Solidarity Among the Poor: Risk Sharing in Three Texas Communities

Leading behavioral economist Catherine Eckel will be giving a talk Friday October 10 from 11-12 in Room 230 of the Student Center. The event is sponsored by the Martin School of Public Policy and Administration

Abstract:  Risk-sharing plays an important role in less developed economies, and helps alleviate the impact of major negative events on individuals and households that lack access to credit. Little attention has been paid to the potential role of risk sharing in poorer communities within developed countries. Using data from an incentivized game, we examine informal risk sharing in three low- to moderate-income communities in the United States. Subjects participate in a version of the “solidarity game,” which was developed by Selten and Ockenfels (1998) in order to gauge indirect reciprocity among individuals. In the game subjects are placed in groups of three, and make decisions about how much they are willing to transfer to other members of the group who are disadvantaged by chance.  We find that individuals will share risks by making contingent transfers to less-well-off members of their group, and these transfers vary systematically by individual and community.  In two additional treatments we show that the availability of insurance crowds out informal risk sharing, even among those who do not take up the market alternative, and that profitable investment is hampered by the expectation that gains will be shared.  This research illustrates how lab experiments can be used as a window on the field, providing insights that can be used to improve policy development and implementation.