3 Exogenous or endogenous networks thus appear to play a central role in the organization of risk sharing. First, there is expanding empirical evidence that informal transfers flow through family and social networks. The literature on informal insurance contracts has, however, neglected two key features of informal transfers. 2 Different frictions, such as limited commitment, moral hazard, or hidden income, have different dynamic implications, which can be tested on panel consumption data (e.g., Kinnan 2019). Ligon, Thomas, and Worrall ( 2002) characterize constrained efficient risk-sharing contracts in a dynamic framework with limited commitment. These findings, confirmed by a large literature, have led researchers to model informal transfers as insurance contracts subject to frictions. He found that, even though risk-sharing inefficiency is surprisingly low, household income remains a significant determinant of consumption. Townsend ( 1994) tested and rejected the hypothesis of efficient risk sharing in villages of rural India. 1 Applied economists have extensively studied the effectiveness of informal risk-sharing arrangements. Informal safety nets are key to helping people cope with negative shocks, especially in areas with little or no access to formal insurance. We further explore the relationship between consumption variance and centrality, correlation in consumption streams across agents, and the impact of adding links.Ī set of Teaching Slides to accompany this article are available online as Supplementary Data. We characterize what happens for shocks that leave the structure of giving relationships unchanged. By contrast, large shocks tend to be badly insured in models of informal insurance with frictions. Second, large shocks are well-insured by connected altruism networks. First, bridges can generate good overall risk sharing, and, more generally, the quality of informal insurance depends on the average path length of the network. We uncover two specific empirical implications of altruism networks. Altruistic transfers generate efficient insurance when the network of perfect altruistic ties is strongly connected. We find that altruism networks have a first-order impact on risk. We explore whether altruistic transfers help smooth consumption and how this depends on the shape of the network. Agents are embedded in a fixed network and care about each other. We provide the first analysis of the risk-sharing implications of altruism networks.
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