Job Market Paper

"Socially Close and Socially Distant Connections in Risk Sharing"

Abstract

This paper studies the role of socially close and socially distant connections in providing informal risk sharing in social networks.
Socially close connections are considered to be more effective in enforcing informal risk sharing arrangements, but they may be more economically similar and less numerous than socially distant connections, and hence provide fewer risk sharing opportunities. A simple theoretical framework incorporating these features indicates that larger networks should yield better risk sharing. More socially close connections are beneficial. However, socially distant connections become more valuable when incomes of socially close households are sufficiently positively correlated. I then test the predictions of this model using data on a large number of village based extended family networks in rural Mexico. I document that the incomes of socially close households covary more positively than those of socially distant households. I find that households in large networks achieve better risk sharing. However, this effect is driven primarily by socially distant connections, suggesting that opportunities for risk sharing are relatively more important in this context.