Incentive for risk sharing and trust formation: Experimental and survey evidence from Bangladesh

Shoji, Masahiro (2018): Incentive for risk sharing and trust formation: Experimental and survey evidence from Bangladesh.

Abstract

Although interpersonal trust is essential for socioeconomic development, the formation mechanism of trust is not well understood. Using dyadic data from an experiment and a household survey in rural Bangladesh, this study evaluates whether the incentive for risk sharing increases trust between villagers. Incentive for risk sharing in the dyad is characterized by their negative income correlation, large difference in their risk preferences, and large difference in their income volatilities. The empirical results demonstrate supporting evidence for this hypothesis: incentive for risk sharing, particularly negative income correlation, facilitates trust. These findings suggest that the introduction of safety net programs such as health insurance, which reduce the incentive for risk sharing, may break down trust. This implication could make an important contribution to our understanding of the effect of industrialization on social capital—an effect that has long been discussed.

• Item Type: MPRA Paper
• Language: English
• Keywords: Trust formation; risk sharing; experiment; Bangladesh
• Subjects: C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior; D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis

References

Albarran, P. and Attanasio, O. P. (2003). “Limited commitment and crowding out of private transfers: Evidence from a randomised experiment”. The Economic Journal 113 (March), C77-C85.

Aoyagi, K., Sawada, Y., and Shoji, M. (2014). “Does infrastructure facilitate social capital accumulation? Evidence from natural and artefactual field experiments in a developing country”. JICA-RI Working Paper, no.65.

Ashraf, N., Bohnet, I., and Piankov, N. (2006). “Decomposing trust and trustworthiness”. Experimental Economics 9 (3), 193-208.

Banfield, E. C. (1958). The moral basis of a backward society. New York: Free Press.

Barr, A. (2003). “Trust and expected trustworthiness: Experimental evidence from Zimbabwean villages”. Economic Journal 113 (489), 614-630.

Bardhan, P. (2000). “Irrigation and cooperation: An empirical analysis of 48 irrigation communities in South India”. Economic Development and cultural change, 48(4), 847-865.

Behrman, J. R., and Deolalikar, A., (1990) The intrahousehold demand for nutrients in rural South India: individual estimates, fixed effects and permanent income, The Journal of Human Resources, 25(4), pp. 655–696.

Berg, J., Dickhaut, J., and McCabe, K. (1995) “Trust, reciprocity, and social history”. Games and Economic Behavior 10 (1), 122-142.

Berggren, N., and Jordahl, H. (2006). “Free to Trust: Economic Freedom and Social Capital”. Kyklos 59 (2), 141-169.

Binzel, C. and Fehr, D. (2013). “Social distance and trust: Experimental evidence from a slum in Cairo”. Journal of Development Economics 103 (1), 99-106.

Bjørnskov, C. (2006). “Determinants of generalized trust: A cross-country comparison”. Public Choice 130 (1), 1-21.

Bohnet, I. and Baytelman, Y. (2007). “Institutions and Trust: Implications for References, Beliefs and Behavior” Rationality and Society, 19(1) 99-135.

Bohnet, I., Greig, F., Herrmann, B., and Zeckhauser, R. (2008). “Betrayal aversion: Evidence from Brazil, China, Oman, Switzerland, Turkey, and the United States”. American Economic Review 98 (1), 294-310.

Bohnet, I., and Zeckhauser, R. (2004). “Trust, risk and betrayal”. Journal of Economic Behavior & Organization 55 (4), 467-484.

Bouckaert, J. and Dhaene, G. (2004). “Inter-ethnic trust and reciprocity: results of an experiment with small businessmen”. European Journal of Political Economy 20 (4), 869-886.

Bouma, J., Bulte, E., & van Soest, D. (2008). “Trust and cooperation: Social capital and community resource management”. Journal of environmental economics and management, 56(2), 155-166.

Brandts, J., and Charness, G. (2011). “The strategy versus the direct-response method: A first survey of experimental comparisons”. Experimental Economics 14 (3), 375–98.

Cameron, A. C., Gelbach, J. B., & Miller, D. L. (2008). “Bootstrap-based improvements for inference with clustered errors”. The Review of Economics and Statistics, 90(3), 414-427.

Cardenas, J. C., and Carpenter, J. (2008). “Behavioural development economics: lessons from field labs in the developing world”. Journal of Development Studies 44 (3), 337-364.

Carter, M.R., and Castillo, M. (2005) “Coping with disaster: Morals, markets, and mutual insurance – using economic experiments to study recovery from Hurricane Mitch”. The Social Economics of Poverty edited by Barret, C. B. New York, Routledge.

Carter, M.R., and Maluccio, J.A. (2003) “Social capital and coping with economic shocks: An analysis of stunting of South African children”. World Development 31 (7), 1147-1163.

Charness, G., and Genicot, G. (2009). “Informal risk sharing in an infinite-horizon experiment”. The Economic Journal 119 (537), 796-825.

Coate, S., and Ravallion, M. (1993). “Reciprocity without commitment; Characterization and performance of informal insurance arrangement”. Journal of Development Economics 40(1), 1-24.

Coleman, J. (1990). Foundations of Social Theory. The Belknap Press of Harvard University Press.

Collins, D., Morduch, J., Rutherford, S., & Ruthven, O. (2009). Portfolios of the poor: how the world's poor live on $2 a day. Princeton University Press.

Cox, J. C. (2004). “How to identify trust and reciprocity”. Game and Economic Behavior 46 (2), 260-281.

Dubois, P., Jullien, B., and Magnac, T. (2008) “Formal and informal risk sharing in LDCs : theory and empirical evidence.” Econometrica, 76(4), 679-725.

Durante, R. (2009). “Risk, cooperation and the economic origins of social trust: An empirical investigation”. MPRA Paper 25887.

Etang, A. Fielding, D., and Knowles, S. (2011) “Does trust extend beyond the village? Experimental trust and social distance in Cameroon” Experimental Economics, 14 (1), 15-35.

Fafchamps, M. (1999). “Risk sharing and quasi-credit”. The Journal of International Trade & Economic Development: An International and Comparative Review 8 (3), 257-278.

Fafchamps, M. (2004). Market Institutions in sub-Saharan Africa: Theory and evidence. Cambridge, Mass.: MIT Press.

Fafchamps, M. (2010). “Risk sharing between households.” Handbook of Social Economics, 1A, 1255-1280.

Fafchamps, M., & Gubert, F. (2007). The formation of risk sharing networks. Journal of Development Economics, 83 (2), 326–350.

Fafchamps, M., & Lund, S. (2003). Risk-sharing networks in rural Philippines. Journal of development Economics, 71(2), 261-287.

Falk, A., and Zehnder, C. (2013). “A city-wide experiment on trust discrimination”. Journal of Public Economics 100 (1), 15-27.

Fehr, E. (2009). On the economics and biology of trust. Journal of the European Economic Association, 7(2‐3), 235-266.

Feigenberg, B., Field, E. M., and Pande, R. (2013). “The Economic Returns to Social Interaction: Experimental Evidence from Microfinance”. Review of Economic Studies, 80 (4), 1459-1483.

Fershtman, C., and Gneezy, U. (2001). “Discrimination in a segmented society: An experimental approach”. The Quarterly Journal of Economics 116 (1), 351-377.

Fisman, R., and Khanna, T. (1999). “Is trust a historical residue? Information flows and trust levels”. Journal of Economic Behavior & Organization 38 (1), 79-92.

Forsythe, R., Horowitz, J. L., Savin, N. E., and Sefton, M. (1994). “Fairness in simple bargaining experiments”. Game and Economic Behavior 6 (3), 347-369.

Foster, A. D., and Rosenzweig, M. R. (2001). “Imperfect commitment, altruism, and the family: Evidence from transfer behavior in low-income rural areas”. Review of Economics and Statistics 83 (3), 389-407.

Fukuyama, F. (1995). Trust: The social virtues and the creation of prosperity (No. D10 301 c. 1/c. 2). New York: Free press.

Gambetta, D. (1998) “Can We Trust Trust?” in Gambetta, Diego (ed.) Trust: Making and Breaking Cooperative Relations, electronic edition, Department of Sociology, University of Oxford, chapter 13, pp. 213-237

Genicot, G., & Ray, D. (2003). Group formation in risk-sharing arrangements. The Review of Economic Studies, 70(1), 87-113.

Glaeser, Edward L., David I. Laibson, José A. Scheinkman and Christine L. Soutter. 2000. Measuring Trust, Quarterly Journal of Economics, 115(3), 811-846.

Gneezy, U., Leibbrandt, A., & List, J. A. (2015). “Ode to the sea: Workplace Organizations and Norms of Cooperation.” The Economic Journal, forthcoming.

Greene, W. H., (2011). Econometric Analysis, Pearson Education.

Hardin, R. (2002). Trust and Trustworthiness, 4, New York: Russell Sage Foundation.

Hayami, Y. (2009). Social capital, human capital and the community mechanism: Toward a conceptual framework for economists. Journal of Development Studies, 45(1), 96-123.

Huck, S., Lünser, G. K., and Tyran, J.-R. (2012) “Competition fosters trust”. Games and Economic Behavior 76 (1), 195-209.

Jack, W., & Suri, T. (2014). Risk Sharing and Transactions Costs: Evidence from Kenya's Mobile Money Revolution. The American Economic Review, 104(1), 183-223.

Johansson-Stenman, O., Mahmud, M. and Martinsson, P. (2009) “Trust and Religion: Experimental Evidence from Rural Bangladesh” Economica, 76 (303), 462-485.

Karlan, D., Mobius, M., Rosenblat, T., & Szeidl, A. (2009). “Trust and social collateral”. The Quarterly Journal of Economics, 1307-1361.

Kimball, M. S. (1988). “Farmers' cooperatives as behavior toward risk”. American Economic Review 78(1), 224-232.

Kocherlakota, N. R. (1996). “Implications of efficient risk sharing without commitment.” The Review of Economic Studies 63(4), 595-609.

Koehler, J. J., and Gershoff, A. D., (2003) “Betrayal aversion: When agents of protection become agents of harm” Organizational Behavior and Human Decision Processes, 90 (2), 244–261.

Krueger, D., and Perri, F. (2006). “Does income inequality lead to consumption inequality? Evidence and theory”. The Review of Economic Studies 73 (1), 163-193.

Laczó, S. (2014). Risk Sharing with Limited Commitment and Preference Heterogeneity: Structural Estimation and Testing. Journal of the European Economic Association, 13 (2), 265–292.

Lévy-Garboua, L., Meidinger, C., and Rapoport, B. (2006) “The Formation of Social Preferences: Some Lessons from Psychology and Biology” Handbook of the Economics of Giving, Altruism and Reciprocity, vol. 1, ch.7, 545–613.

Ligon, E., and Schechter, L. (2012) “Motives for sharing in social networks” Journal of Development Economics, 99 (1), 13–26.

Ligon, E., Thomas, J. P., and Worrall, T. (2002). “Informal insurance arrangements with limited commitment: Theory and evidence from village economies.” Review of Economic Studies 69 (1), 209-44.

Miguel, E., Gertler, P., and Levine, D. I. (2006). “Does industrialization build or destroy social networks?” Economic Development and Cultural Change 54 (2), 287-317.

Murgai, R., Winters, P., Sadoulet, E., & De Janvry, A. (2002). Localized and incomplete mutual insurance. Journal of development Economics, 67(2), 245-274.

Ogaki, M. and Zhang, Q. (2001) “Decreasing Relative Risk Aversion and Tests of Risk Sharing.” Econometrica, 69(2), 515-526

Park, C. (2006) “Risk Pooling between Households and Risk-Coping Measures in Developing Countries: Evidence from Rural Bangladesh.” Economic Development and Cultural Change, 54(2), 423-457.

Platteau, J. P. (1994a). “Behind the market stage where reason societies exist – Part I: The role of public and private order institutions”. Journal of Development Studies 30 (3), 533-578.

Platteau, J. P. (1994b). “Behind the market stage where reason societies exist – Part II: The role of moral norms”. Journal of Development Studies 30 (3), 753-817.

Polanyi, K., (1944/1957). The great transformation: The political and economic origins of our time. Boston: Beacon.

Sapienza, P., Toldra-Simats, A., and Zingales, L. (2013). “Understanding Trust”. Economic Journal, 123 (573), 1313–1332.

Schechter, L. (2007a). “Theft, gift-giving, and trustworthiness: Honesty is its own reward in rural Paraguay”. American Economic Review 97 (5), 1560-1582.

Schechter, L. (2007b). “Traditional trust measurement and the risk confound: An experiment in rural Paraguay”. Journal of Economic Behavior & Organization 62 (2), 272-292.

Shapiro, D. L., Sheppard, B. H., and Cheraskin, L. (1992). “Business on a handshake”. Negotiation Journal 8 (4), 365-377.

Sheppard, B. H., & Sherman, D. M. (1998). The grammars of trust: A model and general implications. Academy of management Review, 23(3), 422-437.

Shoji, M., Aoyagi, K., Kasahara, R., Sawada, Y., and Ueyama, M. (2012). “Social capital formation and credit access: Evidence from Sri Lanka”. World Development. 40 (12), 2522-2536.

Sitkin, S. B., & Roth, N. L. (1993). Explaining the limited effectiveness of legalistic “remedies” for trust/distrust. Organization science, 4(3), 367-392.

Udry, C. (1994). Risk and insurance in a rural credit market: An empirical investigation in northern Nigeria. The Review of Economic Studies, 61(3), 495-526.

Uslaner, E. M. (2002). The moral foundations of trust. Cambridge University Press.

Wade, R. (1988). “The management of irrigation systems: How to evoke trust and avoid prisoner's dilemma”. World Development, 16(4), 489-500.

Yamagishi, T. and Yamagishi, M. (1994). “Trust and commitment in the United States and Japan”. Motivation and Emotion 18 (2), 129-166.