Income Interdependence and Informal Risk Sharing Under the Shadow of the Future
We propose a framework to analyze the effects of income interdependence between two players on risk sharing without commitment. In theory, the likelihood that an informal risksharing agreement is self-enforcing decreases with income correlation. We tested this prediction in the laboratory with negative, zero, and positive correlation coefficients and observed the largest average transfer in the positive-correlation treatment. This surprising result suggests that experiencing the same state of income could create a social bond and induce altruism between the two players. Therefore, informal risk sharing can be successful in a group with social identity despite high income correlation.