Consumption Risk-sharing in Social Networks

We build a model of informal risk-sharing in social networks, where connections be-tween individuals can be used as social collateralto enforce insurance payments. We characterize incentive compatible risk-sharing arrangements and develop two results. (1) Expansive networks, where larger sets of agents have more connections with oth-ers, facilitate better risk-sharing. In particular, two-dimensional networks, where agents have neighbors in multiple directions, are su ¢ ciently expansive to allow very good risk-sharing. We show empirically that social networks in Peru shantytowns sat-isfy this condition, suggesting that real-world networks in developing countries should generate good informal insurance. (2) In second-best arrangements, agents organize in endogenous risk-sharing islandsin the network, where shocks are shared fully within but imperfectly across islands. As a result, risk-sharing is local: socially closer agents insure each other more