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Puey Ungphakorn
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23 October 2022
20221666483200000

Income Interdependence and Informal Risk Sharing: The Effects of Future Interactions and Directed Altruism

Abstract

We propose a framework to analyze the effects of income correlation between two players on risk sharing without commitment. In theory, the likelihood that a risk-sharing 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 interdependence.

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The views expressed in this workshop do not necessarily reflect the views of the Puey Ungphakorn Institute for Economic Research or the Bank of Thailand.
Tags: risk sharingincome correlationinfinite horizon gamesincome smoothingaltruismeconomic experiments
Paan Jindapon
Paan Jindapon
University of Alabama
Pacharasut Sujarittanonta
Pacharasut Sujarittanonta
Cramton Associates
Ajalavat Viriyavipart
Ajalavat Viriyavipart
American University of Sharjah

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