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Voluntary Contributions to a Mutual Insurance Pool
Author(s) -
LÉVYGARBOUA LOUIS,
MONTMARQUETTE CLAUDE,
VAKSMANN JONATHAN,
VILLEVAL MARIE CLAIRE
Publication year - 2017
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/jpet.12181
Subject(s) - dual (grammatical number) , economics , context (archaeology) , risk aversion (psychology) , microeconomics , turnover , aggregate (composite) , econometrics , actuarial science , expected utility hypothesis , mathematical economics , art , paleontology , literature , management , biology , materials science , composite material
We study mutual‐aid games in which individuals choose to contribute to an informal mutual insurance pool. Individual coverage is determined by the aggregate level of contributions and a sharing rule. We analyze theoretically and experimentally the ( ex ante ) efficiency of equal and contribution‐based coverage. The equal coverage mechanism leads to a unique no‐insurance equilibrium while contribution‐based coverage develops multiple equilibria and improves efficiency. Experimentally, the latter treatment reduces the amount of transfers from high contributors to low contributors and generates a “dual interior equilibrium.” That dual equilibrium is consistent with the co‐existence of different prior norms which correspond to notable equilibria derived in the theory. This results in asymmetric outcomes with a majority of high contributors less than fully reimbursing the global losses and a significant minority of low contributors less than fully defecting. Such behavioral heterogeneity may be attributed to risk attitudes (risk tolerance vs risk aversion) which is natural in a risky context.