Informal Insurance and Income Inequality

Laczó, Sarolta (2008): Informal Insurance and Income Inequality.

Abstract

This paper examines the effects of income inequality in a risk sharing model with limited commitment, that is, when insurance agreements have to be self-enforcing. In this context, numerical dynamic programming is used to examine three questions. First, I consider heterogeneity in mean income, and study the welfare effects when inequality together with aggregate income increases. Second, subsistence consumption is introduced to see how it affects consumption smoothing. Finally, income is endogenized by allowing households to choose between two production technologies, to look at the importance of consumption insurance for income smoothing.

• Item Type: MPRA Paper
• Language: English
• Keywords: risk sharing, limited commitment, inequality, technology choice, developing countries
• Subjects: I - Health, Education, and Welfare > I3 - Welfare, Well-Being, and Poverty > I30 - General; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O12 - Microeconomic Analyses of Economic Development