Altruism, Matching, and Nonmarket Insurance

Abstract

Incomplete market insurance gives rise to nonmarket coinsurance arrangements. We find that the effort altruistically-linked individuals take to avoid an accident increases with the degree of altruism. If the degree of altruism is sufficiently high, an economy with nonmarket insurance yields higher social welfare than an economy without nonmarket insurance. As altruism increases, the equilibrium level of effort approaches the second-best solution without the need for costly monitoring. Coinsurance is above (below) the socially optimal level if individuals place greater weight (less weight) on their own utility than on that of their partners.

JEL Classification: D82, D1, D62, G22