Group Size and the Efficiency of Informal Risk Sharing

Emla Fitzsimons,Bansi Malde,Marcos Vera‐Hernández

doi:10.1111/ecoj.12565

Abstract

The objective of this paper is to understand and test empirically the relationship between group size and informal risk sharing. Models of informal risk sharing with limited commitment and grim-trigger punishments upon deviation imply that larger groups provide better informal insurance. However, when subgroups of households can credibly deviate, so that sustainable informal arrangements ought to be coalition-proof, the relationship between group size and the amount of insurance is unclear. Building on the framework of Genicot and Ray (2003), we show that this relationship is theoretically ambiguous. We then investigate it empirically using data on the size of the sibships of the household head and spouse in rural Malawi. To identify the relevant potential group within which risk is shared, we exploit a social norm among the main ethnic group in our sample which is such that the brothers of the wife should play a key role in ensuring her household’s wellbeing. We ?nd that households in which the wife has many brothers are not well-insured against crop loss events. Importantly, we fail to uncover a similar relationship for the sisters of the wife, ruling out that our ?ndings are driven by wives with many siblings (e.g. brothers) having poorer extended family networks. Calibrating our theoretical framework using values similar to those in our sample produces a relationship between household risk sharing and group size that is similar to that uncovered in the data, indicating that the threat of coalitional deviations can explain our empirical ?ndings.

Highlights

Risk is a salient feature of daily life in rural areas of developing countries
These contexts are characterised by market imperfections such as weak enforcement, costly monitoring, poor infrastructure and weak government capacity; which lead to missing or incomplete insurance and credit markets, and an absence of government social safety nets to help mitigate the effects of risk
We study the relationship between group size and the extent of risk sharing in a setting with limited commitment and coalitional deviations

Summary

Introduction

Risk is a salient feature of daily life in rural areas of developing countries. These contexts are characterised by market imperfections such as weak enforcement ( known as limited commitment), costly monitoring, poor infrastructure and weak government capacity; which lead to missing or incomplete insurance and credit markets, and an absence of government social safety nets to help mitigate the effects of risk. Instead, households rely on a variety of informal mechanisms, such as (informal) transfers and loans from relatives and friends, to deal with the consequences of risk (Besley, 1995). As shown in the seminal paper by Genicot and Ray (2003), when arrangements need to be robust to deviations by sub-groups, larger groups can be destabilised by smaller sub-groups that are large enough to provide significant levels of risk sharing, meaning that stable groups that can sustain risk sharing are bounded from the top. This suggests that the relationship between group size and risk sharing is unclear. The exact nature of the relationship between group size and risk sharing is an empirical question

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Conclusion