Group size and the efficiency of informal risk sharing

Abstract

This paper seeks 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 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 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 risk sharing group, we exploit a social norm among the main ethnic group in our sample - that the wife’s brothers play a key role in ensuring her household’s wellbeing. We find that households where the wife has many brothers are poorly insured against crop loss events. We fail to uncover a similar relationship for the wife’s sisters, ruling out that our findings are driven by wives with many siblings (e.g. brothers) simply having poorer extended family networks. A simple calibration exercise indicates that the threat of coalitional deviations can explain our empirical findings.