Characterising Informal Risk Sharing in Family Networks

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Risk is extremely prevalent in rural areas of developing countries, but markets for credit and insurance are undeveloped and governments rarely provide the type of social insurance common in developed economies, with the consequence that risk has considerable repercussions for household wellbeing both in the short and long run. Households in these contexts resort to informal tools, such as transfers and loans between relatives and friends, to share idiosyncratic risk. Such informal risk sharing likely occurs within social networks (friends and family), since interpersonal relationships between network members can alleviate frictions such as asymmetric information, as individuals who know each other well and interact frequently can share information and effectively enforce informal arrangements. Family networks, in particular, fulfil these features and form a "natural" risk sharing institution. This research aims to deepen our understanding of risk sharing in family networks theoretically and empirically, focusing explicitly on the role of network structure (representation of who is related to who). This is likely important because many informal tools employed for risk sharing rely on bilateral relationships. Therefore, who one is linked with and who their links are further linked with is will shape both how risk is shared and the amount shared. Very few empirical studies in economics have considered the role of network structure in shaping economic outcomes, though this has been shown to be important in fields such as sociology. A reason for this is a lack of suitable datasets containing both information on network links and extensive socio-economic information. A key innovation of this study is to circumvent this problem using a rich dataset from Mexico with both of these. Family network links can be identified using the Mexican naming convention, whereby each individual has 2 surnames - one from each parent. This dataset has detailed socio-economic information (at multiple points over 10 years) on all households living in over 500 villages, allowing me to identify the entire village based extended family network and construct valid tests for risk sharing.The proposed research will:1. Provide empirical evidence on the importance of network structure for risk sharing. Recent theoretical work confirms this and predicts that network structure matters for whether or not risk sharing occurs and the amount that can be achieved. Yet, there is almost no empirical evidence on this, due to data constraints mentioned above. This research will construct and implement empirical tests for these models, exploiting the rich information in the data to account for concerns that results may be driven by the fact that family networks (and network structure) may have formed specifically for risk sharing purposes. 2. Investigate empirically predictions from theory that networks of higher value provide better insurance. An original contribution will be to approximate the value of a link (and network) using information on consumption and wealth.3. Investigate whether altruism, or mutual caring, in family networks allows for more risk sharing under limited commitment, by allowing for a wider set of risk sharing arrangements. I will investigate whether this is the case theoretically and empirically.Understanding the drivers of informal risk sharing is important for policy: government policies aimed at improving insurance could do the converse by crowding out informal risk sharing. This research will inform the design of government policies and insurance products aimed at improving insurance for the poor, a subject of on-going interest and debate in Latin America and other low and middle-income countries, and among insurance companies.