Heterogeneity and the formation of risk-sharing coalitions

Fernando Jaramillo, Hubert Kempf, Fabien Moizeau

Research output: Contribution to journalArticle

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Abstract

© 2014 Elsevier B.V.We study the relationship between the distribution of individuals' attributes over the population and the extent of risk sharing in a risky environment. We consider a society where individuals voluntarily form risk-sharing groups in the absence of financial markets. We obtain a partition of society into distinct coalitions leading to partial risk sharing. When individuals differ only with respect to risk, the partition is homophily-based: the less risky agents congregate together and reject more risky ones into other coalitions. The distribution of risk affects the number and size of these coalitions. It turns out that individuals may pay a lower risk premium in more risky societies. We show that a higher heterogeneity in risk leads to a lower degree of partial risk sharing. The case of heterogenous risk aversion generates similar results. The empirical evidence on partial risk sharing can be understood when the endogenous partition of society into risk-sharing coalitions is taken into account.
Original languageEnglish (US)
Pages (from-to)79-96
Number of pages18
JournalJournal of Development Economics
DOIs
StatePublished - May 1 2015

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Risk sharing
Homophily
Empirical evidence
Financial markets
Risk premium
Risk aversion

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Jaramillo, F., Kempf, H., & Moizeau, F. (2015). Heterogeneity and the formation of risk-sharing coalitions. Journal of Development Economics, 79-96. https://doi.org/10.1016/j.jdeveco.2014.09.003
Jaramillo, Fernando ; Kempf, Hubert ; Moizeau, Fabien. / Heterogeneity and the formation of risk-sharing coalitions. In: Journal of Development Economics. 2015 ; pp. 79-96.
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Jaramillo, F, Kempf, H & Moizeau, F 2015, 'Heterogeneity and the formation of risk-sharing coalitions', Journal of Development Economics, pp. 79-96. https://doi.org/10.1016/j.jdeveco.2014.09.003

Heterogeneity and the formation of risk-sharing coalitions. / Jaramillo, Fernando; Kempf, Hubert; Moizeau, Fabien.

In: Journal of Development Economics, 01.05.2015, p. 79-96.

Research output: Contribution to journalArticle

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Jaramillo F, Kempf H, Moizeau F. Heterogeneity and the formation of risk-sharing coalitions. Journal of Development Economics. 2015 May 1;79-96. https://doi.org/10.1016/j.jdeveco.2014.09.003