Mutual insurance and limited commitment: Theory and evidence from village economies

Research output: Contribution to journalArticlepeer-review

Abstract

We study efficient insurance arrangements when there is complete information but limited commitment because only limited penalties can be imposed if households renege on their promises. Insurance arrangements must therefore take into account the fact that households will renege if benefits from doing so outweigh costs. Using a general dynamic model with Markovian aggregate and idiosyncratic uncertainty, we show that efficient arrangements are characterised by a simple updating rule, similar to a simple debt contract with occasional forgiveness. We use Indian village data to test the theory against three alternatives: autarky, full insurance, and a static model of limited commitment
Original languageEnglish
Pages (from-to)209-244
Number of pages36
JournalReview of Economic Studies
Volume69
Issue number1
Publication statusPublished - Jan 2009

Fingerprint Dive into the research topics of 'Mutual insurance and limited commitment: Theory and evidence from village economies'. Together they form a unique fingerprint.

Cite this