Insurance and risk

Households in developing countries are subject to numerous risks such as crop losses, business failures, unemployment and illnesses. Yet, credit and insurance markets are often very incomplete or missing and households rely instead on informal tools and institutions to share risk. To the extent that such informal insurance mechanisms are not perfect, risk can have important consequences for household wellbeing, both in the short and long run. EDePo work on insurance and risk has focused on understanding the effectiveness of the informal tools and institutions employed by households in protecting them against risk and on identifying how risk affects investments in human capital. Researchers at EDePo have also analysed the role played by market imperfections such as limited enforcement (when households do not have recourse to formal institutions such as courts of law to enforce informal arrangements) and imperfect information (when households cannot observe the efforts or incomes of others) in limiting informal risk sharing in these contexts. Ongoing work is investigating the role of social networks and their features in shaping informal insurance, understanding whether asymmetric information problems constrain informal risk sharing in developing countries and how heterogeneous risk attitudes influence the structure of risk sharing contracts in rural areas. Finally, an important strand of work investigates how policy interventions interact with existing informal risk sharing arrangements, thereby altering their structure and affecting the total amount of risk shared.