| Abstract: |
In many rural settings, informal mutual support networks have evolved into
semiformal insurance groups, such as funeral societies. Using detailed panel
data for six villages in Ethiopia, we can distinguish two types of contracts,
in terms of whether payments are only made at the time of death or savings are
accumulated by the group based on premiums paid ex-ante. We characterize these
contracts as the coalition-proof equilibria of a symmetric and stationary
risk-sharing game, and we show numerically that a contract with savings makes
higher demands on enforceability, leading to less cohesive groups finding it
in their interest to choose the contract without savings and that
coalition-proofness is a necessary condition for the coexistence of both
contract types. We show in the data that the type of contract chosen by groups
is correlated with the level of trust and other enforcement improving factors.
We also predict that among the observed contracts, those with group-based
savings and ex-ante payments will attain higher welfare in terms of
consumption smoothing than those observed using no group savings. Using panel
data, and controlling for household fixed effects and time-varying village
level fixed effects, we show that funeral groups are vehicles for risk-sharing
and that contract type matters for performance in line with these predictions.
The results appear robust to endogeneity of group formation and endogenous
selection into contract types. |