Informal Risk Sharing in an Infinite-Horizon Experiment*


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     We are grateful to the California Social Science Experimental Laboratory at UCLA, particularly to Patricia Wong for arranging the logistics and to Raj Advani for expert programming. We also thank Arik Levinson and Roger Lagunoff for their helpful suggestions, as well as seminar participants at Princeton University, the World Bank DECRG, Boston University, Georgetown University, George Washington University, the University of Virginia, the NEUDC at Yale University and the SED conference in Florence. Charness thanks the UCSB Academic Senate and the Russell Sage Foundation for support.


Our laboratory study of risk sharing without commitment captures the main features of a simple model of voluntary insurance. Participants are paired in matches with stochastic endings. Each period they receive fixed endowments and one of the pair (randomly-drawn) also receives an additional amount; they can then make voluntary transfers to each other. While smoothing consumption is attractive, only self-enforcing risk sharing is possible. We find evidence supporting the theory: transfers provide insurance to individuals, a higher match continuation probability raises transfers and more risk-averse individuals make larger transfers. More surprisingly, transfers decrease with ex ante inequality, potentially reflecting considerations of identity.