Informal Insurance, Social Networks, and Savings Access: Evidence from a Lab Experiment in the Field
Social networks are understood to play an important role in smoothing consumption risk, particularly in developing countries where formal contracts are limited and financial development is low. Yet understanding why social networks matter is confounded by endogeneity of risk-sharing partners. This paper, first, examines the causal effect of close social ties between individuals on their ability to informally insure one another. Second, we examine how the interaction of social proximity and access to savings affects consumption smoothing. Theoretically, they could be complements or substitutes. Savings access may crowd out insurance unless social proximity is high, in which case it benefits the highly connected. Or savings may crowd out risk sharing among the highly connected while helping the less connected smooth risk intertemporally. By conducting a lab experiment in the field in Karnataka, India, we study the relationships between inability to commit to insurance, ability to save, and social proximity. We find that limited commitment reduces risk sharing, but social proximity substitutes for commitment. On net, savings allows individuals to smooth risk that cannot be shared interpersonally, with the largest benefits for those who are weakly connected in the network.