Risk-sharing networks in rural Philippines

Abstract

Using detailed data on gifts, loans, and asset sales, this paper investigates how rural Filipino households deal with income and expenditure shocks. We find that shocks have a strong effect on gifts and informal loans, but little effect on sales of livestock and grain. Mutual insurance does not appear to take place at the village level; rather, households receive help primarily through networks of friends and relatives. Certain shocks are better insured than others. The evidence is consistent with models of quasi-credit where risk is shared within tighly knit networks through flexible, zero interest informal loans combined with pure transfers.

An Overview of Social Networks and Economic Applications

“…The list of settings where peer effects, or network effects more generally, have been found to be important is a long and varied one. It includes a range of things from criminal behavior (Reiss (1980), Glaeser, Sacerdote and Scheinkman (1996), Kling, Ludwig and Katz (2005), Patacchini and Zenou (2008)), to education (e.g., Calvo-Armengol, Patacchini and Zenou (2008)), to risk-sharing and loan behavior (Fafchamps andLund (2003), De Weerdt (2004), Karlan, Mobius, Rosenblatt, Szeidl (2009)), to obesity , Halladay andKwak (2009) 3 The Structure of Social Networks I now turn to discussing what is known about social networks in terms of their basic structure and how they can be usefully quantified. These issues are of interest from a pure social science perspective to those studying how humans self-organize, as well as a basic tool box for those wishing to further study the role of network structure in economic interactions.…”

The Evolution of Social and Economic Networks

“…Networks also play fundamental roles in the payoffs earned from bargaining with an organization (e.g., Wang and Wen [41]) and in the exchange of goods and services. Exchange examples include trading networks and alliances (e.g., Bell [4], Maxfield [29], Kirman et al [27], Tesfatsion [38,39], Weisbuch et al [42]), and networks through which financial help or insurance is exchanged in developing countries (e.g., Fafchamps and Lund [14]). Even standard matching problems (e.g., the marriage and college admissions problems studied by Gale and Shapley [17] and Roth and Sotomayor [34]) are special situations where network relationships are important.…”

Entrepreneurial Cognition

“…A failure that costs less financially will have a lower impact on the entrepreneur's slack resources than a costlier failure. The greater the financial slack (even if it is still low), the bigger the cushion for tough times (Carroll et al 1992;Fafchamps and Lund 2003), the greater the ability to develop future options and plans (Lentz and Tranaes 2005;Wanberg et al 1999), and thus the more certainty about the future. Nevertheless, higher losses from a failure could make future plans unaffordable or inaccessible.…”