Is informal risk-sharing less effective for the poor? Risk externalities and moral hazard in mutual insurance

Matthieu Delpierre, Bertrand Verheyden, Stéphanie Weynants

Résultats de recherche: Contribution à un journal/une revueArticle

Résumé

Poor farm-households are less keen to adopt high risk/high return technologies than rich households. Yet, the poor are more vulnerable to income shocks. We develop a model of endogenous risk-taking to explain these facts. In autarky, poor households adopt less risky production plans and obtain lower expected returns, but face higher relative risk than the rich. The introduction of risk-sharing generates negative risk externalities between agents. At the first best, the social planner imposes a homogeneous level of risk-taking in the group. At the second best, risk-taking is not enforceable and increases with insurance, generating moral hazard. Interestingly, the poor's risk-taking behavior is more sensitive to insurance. The social planner thus mitigates risk-taking by applying a lower insurance coverage in poor groups. The introduction of risk-sharing therefore reinforces the gap between rich and poor in terms of expected income and absolute risk, while the effect on relative risk is ambiguous.

langue originaleAnglais
Pages (de - à)282-297
Nombre de pages16
journalJournal of Development Economics
Volume118
Les DOIs
étatPublié - 2016

Empreinte digitale

insurance
hazard
externality
Risk taking
Mutual insurance
Externalities
Risk sharing
Moral hazard
income
Insurance
insurance coverage
Household
Relative risk
farm
Group

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abstract = "Poor farm-households are less keen to adopt high risk/high return technologies than rich households. Yet, the poor are more vulnerable to income shocks. We develop a model of endogenous risk-taking to explain these facts. In autarky, poor households adopt less risky production plans and obtain lower expected returns, but face higher relative risk than the rich. The introduction of risk-sharing generates negative risk externalities between agents. At the first best, the social planner imposes a homogeneous level of risk-taking in the group. At the second best, risk-taking is not enforceable and increases with insurance, generating moral hazard. Interestingly, the poor's risk-taking behavior is more sensitive to insurance. The social planner thus mitigates risk-taking by applying a lower insurance coverage in poor groups. The introduction of risk-sharing therefore reinforces the gap between rich and poor in terms of expected income and absolute risk, while the effect on relative risk is ambiguous.",
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Is informal risk-sharing less effective for the poor? Risk externalities and moral hazard in mutual insurance. / Delpierre, Matthieu; Verheyden, Bertrand; Weynants, Stéphanie.

Dans: Journal of Development Economics, Vol 118, 2016, p. 282-297.

Résultats de recherche: Contribution à un journal/une revueArticle

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AU - Verheyden, Bertrand

AU - Weynants, Stéphanie

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KW - Risk externality

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