INFORMAL RISK SHARING IN AN INFINITE-HORIZON EXPERIMENT

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.