A Novel Analysis of Risk Sharing Effects on Income Inequality in Informal Insurances

Author

Faculty of Economics & Administrative Sciences, University of Mazandaran

Abstract

T





his study aims to demonstrate that joining in risk sharing network leads to the reduction in incomes volatility. In this respect, income variance for a group of members in an informal insurance is modelled in which income variance prior to joining risk sharing network and after joining is analyzed statistically. A Monte Carlo simulation technique is used to prove the result. To extend and analyze the sensitivity, a simulation is performed on either small size population or large size population, the probability of occurrence and the amount of loss are also repeated in all levels. The result of study shows that joining to risk sharing network significantly decreases the income volatility. It is also proved that the probability of occurrence and the amount of loss positively affect the intensity of income volatility.

Keywords

References

Ahmed-Mushfiq, M., & Rosenzweig, M. R. (2013). Informal Risk Sharing, Index Insurance, and Risk Taking in Developing Countries. The American Economic Review, 103(3), 375-380.
Ambrus, A., Chandrasekhar, A., & Elliott, M. (2015). Social Investment, Informal Risk Sharing and Inequality. Duke Working Paper Series, ERID-178, Retrieved from
http://EconPapers.repec.org/RePEc:red:sed015:189.
Amiel, Y., Cowell, F. A. & Polovin, A. (2001). Risk Perceptions, Income Transformations and Inequality. European Economic Review, 45(4-6), 964-976.
 
Arnott, R., & Stiglitz, J. (1991). Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring? American Economic Review, 81(1), 179-190.
Attanasio, O., Barr, A., Cardenas, J. C., Genicot, G., & Meghir, C. (2012). Risk Pooling, Risk Preferences and Social Networks. American Economic Journal, 4, 134-167.
Besley, T. (1995). Nonmarket Institutions for Credit and Risk Sharing in Low-Income Countries.  The Journal of Economic Perspectives, 9(3), 115-127.
Bloch, F., Genicot, G., & Ray, D. (2008). Informal Insurance in Social Networks. Journal of Economic Theory, 143, 36-58.
Bonfiglioli, A. (2012). Investor Protection and Income Inequality: Risk Sharing vs. Risk Taking. Journal of Development Economics, 99, 92-104.
Delpierre, M., Verheyden, B., & Weynants, S. (2016). Is Informal Risk-Sharing Less Effective for the Poor? Risk Externalities and Moral Hazard in Mutual Insurance. Journal of Development Economics, 118, 282-297.
Dercon, S., & Christiaensen, L. (2011). Consumption Risk, Technology Adoption, and Poverty Traps: Evidence from Ethiopia. Journal of Development Economics, 94(1), 141-166.
Dercon, S. (2005). Risk, Insurance, and Poverty: A Review. Oxford: Oxford University Press.
Fafchamps, M., & Gubert, F. )2007). Risk Sharing and Network Formation. American Economic Review, 97, 75-79.
Fafachamps, M., & Lund, S. (2003). Risk-Sharing Networks in Rural Philippines. Journal of Development Economics, 71(2), 261-287.
 
Fischer, G. (2013). Contract Structure; Risk Sharing, and Investment Choice. Econometrica, 81(3), 883-939.
Habtom, G., & Ruys, P. (2007). Traditional Risk-Sharing Arrangements and Informal Social Insurance in Eritrea. Health Policy, 80, 218-235.
Jalan, J., & Ravallion, M. (1999). Are the Poor Less Well Insured? Evidence on Vulnerability to Income Risk in Rural China. Journal of Development Economics, 58, 61-81.
Kurosaki, T., & Fafchamps, M. (2002). Insurance Market Efficiency and Crop Choices in Pakistan. Journalof Development Economics, 67(2), 419-453.
Laczo, S. (2015). Risk Sharing with Limited Commitment and Preference Heterogeneity: Structural Estimation and Testing. Journal of the European Economic Association, 13, 265-292.
Lam, L. M., & Paul, S. (2013). Displacement and Erosion of Informal Risk-Sharing: Evidence from Nepal. World Development, 43, 42-55.
 
Iranian Economic Review
Volume 21, Issue 2
June 2017
Pages 230-240

Files

Share

How to cite

Statistics