The crowding-out effect of formal insurance on informal risk sharing: An experimental study

• Published in: Games and economic behavior Vol. 86; pp. 184 - 211
• Main Authors: Lin, Wanchuan, Liu, Yiming, Meng, Juanjuan
• Format: Journal Article
• Language: English
• Published: Duluth Elsevier Inc 01.07.2014; Academic Press
• Subjects: Altruism; Crowding-out effect; Economic behaviour; Experiments; Forecasts; Game theory; Income inequality; Informal risk sharing; Insurance; Insurance coverage; Laboratories; Risk management; Risk sharing; Studies; O17; Crowding-out effect; Insurance; C91; Altruism; D81; Informal risk sharing
• ISSN: 0899-8256; 1090-2473
• DOI: 10.1016/j.geb.2014.03.004

This paper investigates the crowding-out effect of formal insurance on informal risk-sharing arrangements via theory and laboratory experiment. Our model and simulation predict that the crowding out of private transfers is often more than one-for-one and will reduce the total risk coverage. Furthermore, the existence of a moderate degree of altruism exaggerates the crowding-out effect, especially when there is an ex-ante income inequality. These predictions are mostly supported by the laboratory experiment, except that the crowding-out effect is not more than one-for-one, and hence the total risk coverage is not significantly reduced by formal insurance. •We model the crowding-out effect of formal insurance on informal risk-sharing transfers.•Our theory analyzes the role of altruism on the crowding-out effect.•Experiment suggests that the crowding-out effect exists but total risk coverage is not reduced.•Crowding-out effect is larger when there is fixed income inequality.•Altruism contributes to the crowding-out effect.