TAILIEUCHUNG - Informal Insurance in Social Networks

So what was the impact, then, of these funds? The IDB’s conclusion is that social funds’ impact is not on employment and income. The big impact is on improvement in living conditions. The funds deliver gov- ernment services to poor communities that never had them before; they develop simple systems of targeting based on basic needs, and they build simple social infrastructure quite efficiently at low cost. They improve the living conditions of the poor even if the measured income of the poor does not go up very much. Social funds symbolize the determination of government to do something to overcome the abysmal living conditions of people, particularly in. | Informal Insurance in Social Networks Francis Bloch GREQAM Université de la Méditerranée and Warwick University Garance Genicot Georgetown University and Debraj Ray New York University and Institute de Análisis Económico CSIC July 2005 revised September 2006 Abstract This paper studies bilateral insurance schemes across networks of individuals. While transfers are based on social norms each individual must have the incentive to abide by those norms and so we investigate the structure of self-enforcing insurance networks. Network links play two distinct and possibly con ictual roles. First they act as conduits for transfers. Second they act as conduits for information. These features a ect the scope for insurance as well as the severity of punishments in the event of noncompliance. Their interaction leads to a characterization of stable networks as networks which are suitably sparse the degree of sparseness being related to the length of the minimal cycle that connects any triple of agents. As corollaries we find that both thickly connected networks such as the complete graph and thinly connected networks such as trees are likely to be stable whereas intermediate degrees of connectedness jeopardize stability. Finally we study in more detail the notion of networks as conduits for transfers by simply assuming a punishment structure such as autarky that is independent of the precise architecture of the network. This allows us to isolate a bottleneck effect the presence of certain key agents who act as bridges for several transfers. Bottlenecks are captured well in a feature of trees that we call decomposability and we show that all decomposable networks have the same stability properties and that these are the least likely to be stable. JEL Classification Numbers D85 D80 012 Z13 Keywords social networks reciprocity networks norms informal insurance. An earlier draft was written while Genicot and Ray were visiting the London School of Economics we thank the LSE for .