Imperfect Monitoring and Informal Risk Sharing: The Role of Social Ties


This paper examines whether social ties sustain informal insurance when there is imperfect monitoring of effort. I use a laboratory experiment, implemented with residents of slums in Nairobi, Kenya, that captures features of a model of risk sharing and effort provision. Overall, I find that individuals are 7% less likely to engage in risk sharing as a result of imperfect monitoring of effort. When effort cannot be observed socially close individuals engage in substantially more risk sharing than socially distant pairs. Participants who know their partner outside the experiment are 31% more likely to engage in risk sharing than those who do not know their partner when effort cannot be observed. Thus, this is the first paper to examine the effects of imperfect monitoring on risk sharing and to provide evidence that social ties sustain cooperation when there is asymmetric information regarding effort.

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    Prachi Jain
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