The Limits to Local Insurance

• Authors: Pau Milán.
• BSE Working Paper: 1293 | October 21
• Keywords: Networks , risk sharing , incomplete markets , market insurance
• JEL codes: D11, D52, D53, D85, G52
• Networks
• risk sharing
• incomplete markets
• market insurance

We study decentralized insurance when multiple risks are payoff-relevant, but each agent may only trade a (possibly different) subset of risks. Unless (at least) one agent can trade every risk, insurance markets remain incomplete, and the economy is not resilient to worst-case events. We also identify spill overs in any feasible allocation: others’ inability to trade some risks restricts an agent’s resilience to joint realizations. Unless an agent can trade a superset of i’s risks, agent i is not resilient to them. In an application, we model constraints as risk-sharing networks and measure resilience in a Malawian village.