How does informal risk sharing affect incentives to avoid risk? While moral hazard is expected under formal insurance, theory suggests that the incentive effects of informal risk sharing are ambiguous: internalization of the external effects of transfers on others may reduce or enhance incentives to avoid risk. To study this issue, which is particularly relevant for developing economies, we designed a novel real-effort lab experiment and conducted it in 16 small villages in rural Mexico. We find that subjects internalize the effects of transfers enough for the presence of transfers to significantly increase effort compared to autarky situations.
informal insurance; effort; moral hazard; free-riding effect; empathy effect;
- C91: Laboratory, Individual Behavior
- D64: Altruism • Philanthropy
- O12: Microeconomic Analyses of Economic Development
Ingela Alger, Laura Juarez, Miriam Juarez-Torres, and Josepa Miquel-Florensa, “Do informal transfers induce lower efforts? Evidence from lab-in-the-field experiments in rural Mexico”, IAST working paper, n. 16-34, February 2016, revised September 2018.
Economic Development and Cultural Change, 2019, forthcoming