DP16621 Formal insurance and altruism networks

Author(s): Tizié Bene, Yann Bramoullé, Frédéric Deroïan
Publication Date: October 2021
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Programme Areas: Public Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16621

We study how altruism networks affect the adoption of formal insurance. Agents have private CARA utilities and are embedded in a network of altruistic relationships. Incomes are subject to both a common shock and a large idiosyncratic shock. Agents can adopt formal insurance to cover the common shock. We show that ex-post altruistic transfers induce interdependence in ex-ante adoption decisions. We characterize the Nash equilibria of the insurance adoption game. We show that adoption decisions are substitutes and that the number of adopters is unique in equilibrium. The demand for formal insurance is lower with altruism than without at low prices, but higher at high prices. Remarkably, individual incentives are aligned with social welfare. We extend our analysis to CRRA utilities and to a fixed utility cost of adoption.