Cooperation in a non-ergodic world on a network - insurance and beyond

Abstract

Cooperation between individuals is emergent in all parts of society; yet, mechanistic reasons for this emergence are ill understood in the literature. A specific example of this is insurance. Recent work has, though, shown that assuming the risk individuals face is proportional to their wealth and optimizing the time average growth rate rather than the ensemble average results in a non-zero-sum game, where both parties benefit from cooperation through insurance contracts. In a recent paper, Peters and Skjold present a simple agent-based model and show how, over time, agents that enter into such cooperatives outperform agents that do not. Here, we extend this work by restricting the possible connections between agents via a lattice network. Under these restrictions, we still find that all agents profit from cooperating through insurance. We, though, further find that clusters of poor and rich agents emerge endogenously on the two-dimensional map and that wealth inequalities persist for a long duration, consistent with the phenomenon known as the poverty trap. By tuning the parameters that control the risk levels, we simulate both highly advantageous and extremely risky gambles and show that despite the qualitative shift in the type of risk, the findings are consistent.