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We provide the first analysis of the risk-sharing implications of altruism networks. Agents are embedded in a fixed network and care about each other. We explore whether altruistic transfers help smooth consumption and how this depends on the shape of the network. We find that altruism networks have a first-order impact on risk. Altruistic transfers generate efficient insurance when the network of perfect altruistic ties is strongly connected. We uncover two specific empirical implications of altruism networks. First, bridges can generate good overall risk sharing, and, more generally, the quality of informal insurance depends on the average path length of the network. Second, large shocks are well-insured by connected altruism networks. By contrast, large shocks tend to be badly insured in models of informal insurance with frictions. We characterize what happens for shocks that leave the structure of giving relationships unchanged. We further explore the relationship between consumption variance and centrality, correlation in consumption streams across agents, and the impact of adding links.
We study the dynamics of risk-sharing cooperatives among heterogeneous agents. Based of their knowledge on their risk exposure and the performance of the cooperatives, agents choose whether or not to remain in the risk-sharing agreement. We highlight the key role of other-regarding preference (altruism and inequality aversion) in stabilizing less segregated (and smaller) cooperatives. Limited knowledge and learning of own risk exposure also contributes to reducing segregation, the two effects (of learning and other-regarding preferences) being complementary. Our findings shed light on the mechanisms behind risk-sharing agreements between agents heterogeneous in their risk exposure.
After‐tax income inequality has risen since the mid‐1990s, as increases in market income inequality have not been offset by greater fiscal redistribution. We argue that the substantial increase in the diversity of consumer goods has mitigated mounting political pressures for redistribution. Within a probabilistic voting framework, we demonstrate that if the share of diversified goods in the consumption bundle increases sufficiently with income, then an increase in goods diversity can reduce the political equilibrium tax rate. Focusing on OECD countries, we find empirical support for both the model's micro‐political foundations and the implied relation between goods diversity and fiscal policy outcomes.
This paper analyses the relationships between HIV/AIDS and education taking into account the appropriative nature of child income. Using a theoretical model, we show that considering remittances from one’s child as an insurance asset can reverse the usual negative relationship between disease prevalence and educational investment. This prediction confirms the results of an empirical study conducted on data compiled from the Demographic and Health Survey (DHS) database for 12 sub-Sahara African countries for children aged between 7 and 22-years-old. Using regional HIV prevalence as a measure of health risk, we find that the ‘sign of the slope’ between health risk and the enrolment of children is not constant. Splitting the data based on expected remittance patterns (for example rural versus urban), we obtain that the effect is most likely driven by household characteristics related to child income appropriation.
This article examines the link between entrepreneurial motivation and business performance in the French microfinance context. Using hand-collected data on business microcredits from a Microfinance Institution (MFI), we provide an indirect measure of entrepreneurial success through loan repayment performance. Controlling for the endogeneity of entrepreneurial motivation in a bivariate probit model, we find that “necessity entrepreneurs” are more likely to have difficulty repaying their microcredits than “opportunity entrepreneurs”. However, type of motivation does not appear to make a difference to business survival. We test for the robustness of our results using parametric duration models and show that necessity entrepreneurs experience difficulties in loan repayment earlier than their opportunity counterparts, corroborating our initial findings. Our results are also robust to a sharper analysis of motivation, focusing on unemployment (on the necessity side) and non-pecuniary benefits from success (on the opportunity side).
We study a risk-sharing agreement where members exert a loss-mitigating action which decreases the amount of reimbursements to be paid in the pool. The action is costly and members tend to free-ride on it. An optimal risk-sharing agreement maximizes the expected utility of a representative member with respect to both the coverage and the (collective) action such that efficiency is restored. We study the sustainability of the optimal agreement as equilibrium in a repeated game with indefinite number of repetitions. When the optimal agreement is not enforceable, the equilibrium with free-riding emerges. We identify an interesting trade-off: welfare generated by the optimal risk-sharing agreement increases with the size of the pool, but at the same time the pool size must not be too large for collective choices to be self-enforcing. This generates a discontinuous effect of pool size on welfare.
We provide the first analysis of altruism in networks. Agents are embedded in a fixed network and care about the well‐being of their network neighbors. Depending on incomes, they may provide financial support to their poorer friends. We study the Nash equilibria of the resulting game of transfers. We show that equilibria maximize a concave potential function. We establish existence, uniqueness of equilibrium consumption, and generic uniqueness of equilibrium transfers. We characterize the geometry of the network of transfers and highlight the key role played by transfer intermediaries. We then study comparative statics. A positive income shock to an individual benefits all. For small changes in incomes, agents in a component of the network of transfers act as if they were organized in an income‐pooling community. A decrease in income inequality or expansion of the altruism network may increase consumption inequality.
Long-term insurance contracts are widespread, particularly in public health and the labor market. Such contracts typically involve monthly or annual premia which are related to the insured's risk profile. A given profile may change, based on observed outcomes which depend on the insured's prevention efforts. The aim of this paper is to analyze the latter relationship. In a two-period optimal insurance contract in which the insured's risk profile is partly governed by her effort on prevention, we find that both the insured's risk aversion and prudence play a crucial role. If absolute prudence is greater than twice absolute risk aversion, moral hazard justifies setting a higher premium in the first period but also greater premium discrimination in the second period. This result provides insights on the trade-offs between long-term insurance and the incentives arising from risk classification, as well as between inter- and intragenerational insurance.
We analyze in this paper how various forms of state intervention can impact microfinance institutions’ lending behavior. Using a simple model where entrepreneurs receive individual uncollateralized loans, we show that, not surprisingly, state intervention through the loan guarantee increases the number of entrepreneurs receiving a loan. However, after modeling business development services (BDS) provided by the microfinance institution, we show that the loan guarantee can have a counterproductive effect by reducing the number of entrepreneurs benefiting from such services. We therefore analyze an alternative policy: BDS subsidization. We show that if BDS are efficient enough and are targeted toward less performing borrowers, then-for fixed government expenditures-such subsidies do better in terms of financial inclusion than the loan guarantee. Moreover, we argue that-under similar conditions-BDS subsidization alone does better in terms of financial inclusion than a mix of policies. Copyright Springer Science+Business Media New York 2014
This paper explores the effect of moral hazard on both risk-taking and informal risk-sharing incentives. Two agents invest in their own project, each choosing a level of risk and effort, and share risk through transfers. This can correspond to farmers in developing countries, who share risk and decide individually upon the adoption of a risky technology. The paper mainly shows that the impact of moral hazard on risk crucially depends on the observability of investment risk, whereas the impact on transfers is much more utility dependent.