Are informal transfers driven by strategic risk-sharing or fairness? Evidence from an experiment in Kenya

Abstract

Individuals often manage low and risky earnings using informal transfers, which are influenced by both fairness norms and the desire for informal risk-sharing. This paper develops an experiment that allows us to disentangle these motives when income can depend on effort. The empirical analysis shows that people are equally likely to give transfers from high-income to low-income partners when income is due to chance as when both participants exert effort to increase expected income; however, participants are less likely to give transfers when one or both partners do not exert effort. These transfers are more likely due to risk-sharing than inequity aversion.