Tizié Béné

I develop a model to explore the interplay between formal insurance and informal risk-sharing networks. Agents face idiosyncratic shocks, which they mitigate by establishing risk-sharing links and opting for formal insurance. When forming a link, agents consider the sum of their utilities. My findings indicate that below the actuarial price, formal insurance eliminates the need for informal networks, leading to an empty network as the unique stable state. Above the actuarial price but still low, specific price thresholds shape stable networks’ structure. Importantly, I find that the size of the largest component in a risk-sharing network can be greater when insurance is priced above the actuarial price level but is still low, compared to a no-insurance scenario.