DP16621 Formal insurance and altruism networks
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.
