An experimental analysis of group size and risk sharing

A. Chaudhuri, L. Gangadharan, P. Maitra

Research output: Chapter in Book/Report/Conference proceedingConference PaperOtherpeer-review

Abstract

In this paper we examine the relationship between group size and the extent of risk sharing in an insurance game played over a number of periods with random idiosyncratic and aggregate shocks to income in each period. Risk sharing is attained via agents that receive a high endowment in one period making unilateral transfers to agents that receive a low endowment in that period. The Pareto optimal allocation is for all agents to place their endowments in a common pool which is then shared equally among members of the group in every period. Theoretically, the larger the group size, the smaller the per capita dispersion in income and greater is the potential value of insurance. Field evidence however suggests that smaller groups do better than larger groups as far as risk sharing is concerned. These often suffer from differences in institutions and risk sharing arrangements that hinder comparability across groups. Results from our experiments show that the extent of mutual insurance is significantly higher in smaller groups, though contributions to the pool are never close to what efficiency requires. Typically it has been argued that costs to group formation and other informational problems result in less cohesive behaviour in larger groups. In this laboratory set-up there are no costs to group formation and also there are no informational asymmetries per se. Agents are typically myopic in nature and they fail to realize the full benefits of risk sharing i.e., the fact that contributing to the pool when one receives a high endowment might not generate immediate returns but in the long run the benefits in terms of utility gain can be substantial. In the short run, any amount placed in the group account yields a return of 1/n where n is the group size, while amount placed in the private account yields a return of 1. The larger the size of the group, the lower is the short term return from contributing to the group account and this is what appears to be driving the result that contributions to the pool are significantly lower in the larger groups.

Original languageEnglish
Title of host publicationMODSIM05 - International Congress on Modelling and Simulation
Subtitle of host publicationAdvances and Applications for Management and Decision Making, Proceedings
Pages986-991
Number of pages6
Publication statusPublished - 1 Dec 2005
EventInternational Congress on Modelling and Simulation 2005: Advances and Applications for Management and Decision Making - Melbourne, Australia
Duration: 12 Dec 200515 Dec 2005
Conference number: 16th
https://www.mssanz.org.au/modsim05/

Conference

ConferenceInternational Congress on Modelling and Simulation 2005
Abbreviated titleMODSIM 2005
Country/TerritoryAustralia
CityMelbourne
Period12/12/0515/12/05
Internet address

Keywords

  • Experiments
  • Group size
  • Reciprocity
  • Risk sharing

Cite this