Balancing Solidarity and Efficiency: New Insights on Risk-sharing and the Interaction between Formal and Informal Insurance Mechanisms

Risk-sharing between households – within a family or community – plays an important role in low income countries, and helps alleviating the impact of negative events when formal insurance and credit is not accessible. Formal insurance and social protection programmes have been expanding rapidly in the developing world over the past decade and might start to replace some of these informal risk-sharing arrangements. So far, however we know very little about how the introduction of a formal insurance mechanism affects and interacts with traditional, informal risk-sharing arrangements and how this interaction in turn shapes economic outcomes such as private transfers, saving and investment.
Therefore, this research project aims to address the following four distinct questions:
1) How does the introduction of a formal insurance mechanism interact with informal savings institutions?
2) How does the introduction of a formal insurance mechanism affect family relations and inter-household transfers?
3) How does the introduction of a formal insurance mechanism affect investment in farm and non-farm activities?
4) What does this imply for the design of formal insurance mechanisms aimed at maintaining social capital while enhancing economic efficiency?
The proposed research project combines and contrasts results from a lab- in-the-field experiment with results from a ‘real life’ intervention, i.e. the introduction of health insurance in a rural community in Burkina Faso. The project not only aims to expand the current theoretical and empirical knowledge base but also aims to make an important methodological contribution. By comparing the findings from the lab-in-the-field experiment with the results from the randomized health insurance intervention, the project aims to contribute to the debate on the validity of lab experiments and their applicability to concrete, ‘real life’ settings.