Are less informed people more honest? A theoretical Investigation with Informal Mutual Insurance

The paper analyzes the effect of improvement in the quality of information on the arrangement of informal mutual insurance. We show that the equilibrium amount of insurance mostly tends to decrease as the quality of the signal improves for any individual. We also show that the improvement in signal quality of an individual makes her better off at the cost of her partner. With community enforcement of insurance arrangements and random matching among community members, we show that less informed individuals are more likely to behave honestly than the more informed community members