Are informal transfers driven by strategic risk-sharing or fairness? Evidence from an experiment in Kenya.

Prachi Jain & Margaret J. Lay

SECTOR

Inclusive Finance

PROJECT TYPE

Laboratory experiment

DOI

Location

Kenya

BEHAVIORAL THEME

Informal Insurance | Risk-sharing | Fairness

OVERVIEW

Individuals often manage low and risky earnings using informal transfers, which
are influenced by both fairness norms and the desire for informal risk-sharing. This
paper develops an experiment that allows us to disentangle these motives when
income can depend on effort. The empirical analysis shows that people are equally
likely to give transfers from high-income to low-income partners when income is
due to chance as when both participants exert effort to increase expected income;
however, participants are less likely to give transfers when one or both partners do
not exert effort. These transfers are more likely due to risk-sharing than inequity
aversion.

THEMATIC AREAS

This paper develops an experiment to explore how social preferences and risk-sharing
motives interact when people agree to give informal transfers of risky earned income. It
finds that partners withhold transfers when one or both partners choose not to exert effort,
but that transfers are similar when income is purely the result of luck and when both
partners choose to exert effort. Though fairness norms may motivate some of the transfers
agreed upon in these contracts, the pattern of withholding transfers when partners choose
not to exert effort is stronger among people who are less risk-averse, suggesting that risk-
sharing drives this result.