Journal Article

Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies

Ethan Ligon, Jonathan P. Thomas and Tim Worrall

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 69, issue 1, pages 209-244
Published in print January 2002 | ISSN: 0034-6527
Published online January 2002 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00204
Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies

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Recent work on consumption allocations in village economies finds that idiosyncratic variation in consumption is systematically related to idiosyncratic variation in income, thus rejecting the hypothesis of full risk-pooling. We attempt to explain these observations by adding limited commitment as an impediment to risk-pooling. We provide a general dynamic model and completely characterise efficient informal insurance arrangements constrained by limited commitment, and test the model using data from three Indian villages. We find that the model can fully explain the dynamic response of consumption to income, but that it fails to explain the distribution of consumption across households.

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Subjects: Economics

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