Risk Preferences and Risk Pooling in Networks: Theory and Evidence from Community Detection in Ghana

• Development Workshop

Date and Location

Tuesday, October 8, 2019, 4:10 PM - 5:30 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

Do individuals share risk with others who have similar risk preferences or different risk preferences? That is, do individuals assortatively match on risk preferences? I investigate this question in both preferred risk sharing networks and effective risk risk pooling commuities. Using risk sharing network data in Ghana, I construct a preferred network and import community detection (clustering) algorithms from network science to partition risk sharing networks into risk pooling communities. I estimate that individuals prefer to assortatively match on risk preferences in risk sharing networks. While assortative matching holds in risk pooling communities, the magnitude is reduced as compared to earlier estimates. In other words, risk pooling communities feature more diverse preferences than network neighborhoods. How does this impact welfare of agents in the network? I build a theoretical model of covariate risk pooling with heterogeneous types from a baseline of perfect idiosyncratic risk sharing. Constructing a planners problem, I compare the actual allocation of types in communities to four benchmarks: optimal risk sharing, no covariate risk sharing, random allocation of types, and preferred allocation of types.