Risk-sharing networks and farsighted stability

Evidences suggest that in some villages of developing countries, agents rely on mutual insurance agreements to deal with income or expenditure shocks. In this paper we analyze which risk-sharing networks can be sustained in the long run when individuals are farsighted rather than myopic, in the sense that they are able to forecast how other agents would react to their actions. In particular, we study whether the farsightedness of the agents leads to a reduction of the tension between stability and e¢ ciency that arises when individuals are myopic. We …nd that if the cost of establishing a mutual insurance agreement is extremely high or extremely small, myopic and farsighted agents form the same risk-sharing networks. For intermediate costs, the farsightedness of the agents plays a crucial role in determining which network is stable. In addition, if a con‡ict between myopic stability and e¢ ciency exists, it may be solved with the introduction of farsighted agents. JEL classi…cation: C70, D85, O17