TAILIEUCHUNG - Mutual Insurance, Individual Savings And Lmited Commitment

A primary justification for government intervention has been the failure of private agricultural insurance markets (see, for example, Appel, Lord, and Harrington, 1999; Hazell, Pomerada, and Valdez, 1986; Goodwin and Smith, 1995). In a 1922 . Department of Agriculture (USDA) bulletin, Valgren describes the disastrous experiences of fire insurance companies that offered crop insurance in the Dakotas and Montana in 1917 and the early 1920s. Severe droughts caused widespread crop losses in those states. The insurance companies had not protected themselves from such large losses and were unable to indemnify the insured farmers. As Valgren concluded, “the outcome of this first attempt to provide a general crop coverage is much to be regretted.” . | MUTUAL INSURANCE INDIVIDUAL SAVINGS AND LIMITED COMMITMENT ETHAN LIGON JONATHAN p. THOMAS AND TIM WORRALL abstract. This paper a dyrapnle model of mutual eo wluu Itouseltolds can also engage in self-insurance by storage. This mutual insurance is informal as it is as- d tlmt there ls to ellfcreemerrt moelumrim. atty mutual in mrougentouts must be self-enforcing. It is shown how consumption allocations satisfy a modified Euler condition and that an enhanced storage technology can cither raise or welfare. Berth . it is shown that the ox ante transfers mtroducod turn dynamic hdertnal tnedohs recently by Gauthier Poitcvin and Gonzalez 1997 arc only used here in the first period with the role of ex ante transfers being replaced by differential individual storage. 1. INTRODUCTION This paper considers a dynamic model of informal insurance in which households face flue-tuating endowment streams but. offer mutual iusuranee or tueome smootlnng by transferring income between themselves. It s assumed that there are no enforceable contracts and hence any implicit insurance arrangement is appropriately modelled as a noncoopera-rive equilibrium. It is the posstbthty of beneffttmg horn future tnsuranee winch acts as an incentive for the current providers of insurance typically those with a current abundance to keep to the informal arrangement. The focus of the paper is on efficient subgame perfect equilibria of such games. Informal insurance in this context has been studied by Thomas and Worrall 1988 Kletzer and Wright 1996 . Koeberlahota 1996 Ltgon. Thomas and w trail 1997 . and Gautlner. Poitevin and Gonzalez 1997 amongst others. Some of the potential emptrieal tmpltearions of these models have been drawn by Hayashi 1996 Foster and Rosenzweig 1995 Platteau 1996 Ligon Thomas and Wrirrall 1997 and Koeberlakota 1996 . Desptte the dynarme nature of the equilibria studied in these papers the underlying models are static in the sense that endowment cannot be .

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