When households can both save individually and insure informally, how do the two interact? We show that an enhanced storage technology can either improve or diminish welfare, and that ex ante transfers are replaced by differential storage.

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Abstract

We examine a dynamic model of mutual insurance when households can also engage in self-insurance by storage, assuming there is no enforcement mechanism so that any insurance is informal and must be self-enforcing. We show that consumption allocations satisfy a modified Euler condition and that an enhanced storage technology can either improve or diminish welfare. We also show that ex ante transfers introduced into dynamic informal insurance models are only used in the first period, with the role of ex ante transfers being replaced by differential individual storage.

BibTeX

@Article{	  ligon-thomas-worrall00,
  author	= {Ethan Ligon and Jonathan P. Thomas and Tim Worrall},
  title		= {Mutual Insurance, Individual Savings, and Limited
                Commitment},
  journal	= {Review of Economic Dynamics},
  year		= 2000,
  volume	= 3,
  number	= 2,
  pages		= {216--246},
  doi		= {10.1006/redy.1999.0081}
}