Sharing as Risk Pooling in a Social Dilemma Experiment

Abstract

"In rural economies with missing or incomplete markets, idiosyncratic risk is frequently pooled through informal networks. Idiosyncratic shocks, however, are not limited to private goods but can also restrict an individual from partaking in or benefiting from a collective activity. In these situations, a group must decide whether to provide insurance to the affected member. We describe results of a laboratory experiment designed to test whether a simple sharing institution can sustain risk pooling in a social dilemma with idiosyncratic risk. We tested whether risk could be pooled without a commitment device and, separately, whether effective risk pooling induced greater cooperation in the social dilemma. We found that even in the absence of a commitment device or reputational considerations, subjects voluntarily pooled risk, thereby reducing variance in individual earnings. In spite of effective risk pooling, however, cooperation in the social dilemma was unaffected."