Media Briefings


  • Published Date: April 2009

In what circumstances will people help others out in time of need by providing loans, gifts or financial transfers? Research by Gary Charness and Garance Genicot uses a two-player laboratory experiment to assess the extent to which people respond to fluctuations in their income by ‘informal risk-sharing’ with others, transferring money when they can in the expectation that they will receive transfers when necessary.

The findings, published in the April 2009 Economic Journal, show that:

  • Participants, whose income is randomly decided at the start of each round of the game, make higher transfers to their counterparts when it is more likely that a match will continue into the next round.
  • The higher the degree of risk aversion that participants have, the more likely they are to make more generous transfers.
  • Reciprocal behaviour is an important factor: the higher the first transfer made by an individual’s counterpart within a match, the higher the individual’s transfer made on receiving additional income in a future round.
  • Greater inequality actually decreases risk-sharing.

Individuals have often been shown to respond to the fluctuations in their income by engaging in informal risk-sharing: providing each other with help in the form of loans, gifts and
transfers in time of need. For example, there is considerable empirical evidence that risk- sharing provides some limited insurance in village communities in developing countries.

The most important limitation appears to arise from the lack of enforceability of these risk-sharing agreements. To be self-enforcing, the expected net benefits from participating in an agreement must be at any point in time larger than the one time gain from defection.

The fact that these agreements must be designed to elicit voluntary participation often seriously limits the extent of insurance they can provide. A growing theoretical literature provides a characterisation of the optimal self-enforcing risk-sharing agreement and some of its consequences.

This study experimentally tests the implications of a simple model of risk-sharing without commitment. Laboratory experiments, with their anonymity and controlled environments, are ideally suited to isolate the effect of the risk-sharing motive from other considerations that would certainly be at play in the field.

The study presents a very simple model of risk-sharing between two individuals without commitment in which, each period, one is selected at random to receive an amount in addition to their fixed income. After observing their own and their counterpart’s incomes, each person can decide on a transfer to the other.

It is common information that there is a given probability that all pairs will be dissolved at the end of each period, with participants re-matched. At the end of the experiment, one period is randomly drawn to count for cash payment.

The researchers analyse the transfers made by the participants. Since transfers could reflect altruism or other social preferences, they must look to patterns in the data to confirm that transfers do represent reciprocal risk-sharing behaviour.

For example, a longer time horizon would be expected to lead to a higher level of risk- sharing. Participants’ degree of risk aversion is likely to correlate positively with chosen transfers. And with risk-sharing, past transfers by the other individual should affect the transfers one makes.

The study finds evidence in support of risk-sharing in the laboratory. Average transfers are considerably higher when it is more likely that a match will continue into the next round. There is a significant positive relationship between one’s degree of risk aversion and one’s transfer choices. Moreover, reciprocal behaviour is shown to be an important factor: the higher the first transfer made by an individual’s counterpart within a match, the higher the individual’s transfer made on receiving the additional income.

The study also tests for the effect of ex-ante inequality on risk- sharing. Although a previous study by Garance Genicot shows that inequality helps risk-sharing in many cases, this research find that inequality actually decreases risk-sharing. The authors discuss possible explanations based on both ease of coordination and one’s identity as being ex-ante ‘poor’ or ‘rich’.

This laboratory evidence of risk-sharing is only a first step towards examining how this behaviour might evolve and how it might be sensitive to institutional considerations. Next

steps include using a more realistic income process and allowing communication between the parties. This is a promising area for future research, as informal risk-sharing is a critical feature of the economy in many contemporary environments.


Notes for editors: ‘Informal Risk-sharing in an Infinite-horizon Experiment’ by Gary Charness and Garance Genicot is published in the April 2009 issue of the Economic Journal.

Gary Charness is at the University of California, Santa Barbara. Garance Genicot is at
Georgetown University.

For further information: contact Gary Charness on +1-805-893-2412 (email:; or Romesh Vaitilingam on 07768 661095 (email: