TY - JOUR
T1 - Heterogeneity and the formation of risk-sharing coalitions
AU - Jaramillo, Fernando
AU - Kempf, Hubert
AU - Moizeau, Fabien
N1 - Publisher Copyright:
© 2014 Elsevier B.V.
Copyright:
Copyright 2015 Elsevier B.V., All rights reserved.
PY - 2015/5/1
Y1 - 2015/5/1
N2 - 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.
AB - 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.
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U2 - 10.1016/j.jdeveco.2014.09.003
DO - 10.1016/j.jdeveco.2014.09.003
M3 - Research Article
AN - SCOPUS:84920904087
SN - 0304-3878
VL - 114
SP - 79
EP - 96
JO - Journal of Development Economics
JF - Journal of Development Economics
ER -