Research

I analyze whether altruism networks undermine incentives to produce in a risky environment. Agents choose effort before an idiosyncratic loss and may make voluntary transfers afterward. Under a sufficient large-loss condition, transfers produce the full-community allocation: each agent's effort raises everyone's consumption after a loss. Agents can rely on others' effort, but they also value the resources their own effort provides to people they care about. I summarize this valuation with responsibility, a network statistic that reflects whom an agent cares about and how those people are connected to potential victims. Responsibility ranks equilibrium effort. With symmetric shocks and interior equilibria, altruistic support lowers average effort relative to the selfish case, yet agents with sufficiently high responsibility can work more. An agent who comes to care more about someone else can even work less as her responsibility and average effort rise: other agents who care strongly about her consumption gain responsibility faster when she bears more of a potential victim's loss. Altruistic support can raise welfare despite lower average effort, but welfare can also be lower than in the selfish case even when transfers equalize consumption across agents after every loss. The effort induced by the transfer system can outweigh the gain from sharing the loss.

Empirical studies show that social ties influence agents’ market behaviour and respond to market incentives. This paper models the formation of informal risk-sharing links alongside a market for formal insurance. Agents face idiosyncratic shocks and can form costly links, purchase formal insurance, or do both. The model identifies two opposing forces. Cheaper formal insurance reduces residual risk and lowers the value of informal links. However, when some risk remains, larger risk-sharing groups improve diversification and can become more attractive. As a result, when link costs are intermediate, reducing insurance prices may generate a non-monotonic response of network structure and may paradoxically strengthen informal risk-sharing. I characterise stable and efficient networks, and show that the multiplicity of pairwise stable networks also provides a channel through which changes in insurance prices can have persistent effects on network structure.

We study how altruism networks affect the demand for formal insurance. Agents with CARA utilities are connected through a network of altruistic relationships. Incomes are subject to a common shock and to a large individual shock, generating heterogeneous damages. Agents can buy formal insurance to cover the common shock, up to a coverage cap. We find that ex-post altruistic transfers induce interdependence in ex-ante formal insurance decisions. We characterize the Nash equilibria of the insurance game and show that agents act as if they are trying to maximize the expected utility of a representative agent with average damages. Altruism thus tends to increase demand of low-damage agents and to decrease demand of high-damage agents. Its aggregate impact depends on the interplay between demand homogenization, the zero lower bound and the coverage cap. We find that aggregate demand is higher with altruism than without altruism at low prices and lower at high prices. Nash equilibria are constrained Pareto efficient.