Affiliation:
1. Department of Economics, Duke University
2. Department of Economics, University of Pennsylvania
3. Universitat Autònoma de Barcelona and Barcelona School of Economics
Abstract
Abstract
This article considers the effect of contracting limitations in risk-sharing networks, arising for example from observability, verifiability, complexity, or cultural constraints. We derive necessary and sufficient conditions for Pareto efficiency under these constraints in a general setting, and we provide an explicit characterization of Pareto efficient bilateral transfer profiles under CARA utility and normally distributed endowments. Our model predicts that network centrality is positively correlated with consumption volatility, as more central agents become quasi-insurance providers to more peripheral agents. The proposed framework has important implications for the empirical specification of risk-sharing tests, allowing for local risk-sharing groups that overlap within the village network.
Publisher
Oxford University Press (OUP)
Subject
Economics and Econometrics
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