Imperfect monitoring and informal insurance: The role of social ties

Abstract

This paper examines whether social ties impact informal insurance in the presence of asymmetric information. Using games with residents of informal settlements in Kenya, I vary the observability of task completion and partners. While individuals are less likely to make transfers as a result of imperfect monitoring, socially close individuals are 30% more likely to make transfers. As a result, socially close individuals are 47% more likely to make transfers than socially distant individuals when task completion cannot be observed. I then explore the mechanisms by which social connections influence risk sharing. I find evidence that social connections increase participants’ motivation to work only when task completion cannot be observed, potentially due to social collateral and/or intrinsic motivation.