Information, Networks and Informal Insurance: Evidence from a Lab Experiment in the Field
When communities engage in risk-sharing with asymmetric information, wherein a member of a risk-sharing group is unable to verify the income and shocks experienced by the others, they are unable to achieve full smoothing of income risk (Thomas and Worrall 1990). The frictions that drive the possible negative impacts of hidden income are likely to be mediated by the relationships among a risk-sharing group’s members in the social network. Using a laboratory experiment in Karnataka, India, we study the interaction of informal insurance with hidden income, hidden savings, and social networks. Hidden income significantly reduces risk sharing: transfers between partner falls by ~40% on average when income is hidden, though the effect of hidden income is mitigated when player can chose their risk-sharing partners. Among self-selected dyads, there is a strong correlation between social proximity and better risk-sharing. However, social proximity does not improve risk sharing when partners of the same distance are randomly assigned. This suggests that aspects of social networks beyond geodesic proximity matter for risk sharing when information is hidden. Finally, for pairs with low social proximity, removal of commitment on top of hidden income and savings appears to further crowd out interpersonal risk-sharing, while pairs who are closely connected via the networks appear less affected by removal of commitment.