The Effect of Ethnic Heterogeneity on the Formation of Informal Insurance Networks in South India

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2012
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Haverford College. Department of Economics
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eng
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Open Access
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Abstract
This paper looks at the effect that two different indices designed to summarize ethnic heterogeneity have on the formation of informal insurance networks in 75 villages in south India. Using extensive network data, a measure for the borrowing and lending behavior is constructed. An OLS framework is used to observe the impact that ethnic polarization and fractionalization have on borrowing and lending of money and of rice and kerosene in these communities. The paper finds an inverse, non-monotonic relationship between the measures of ethnic heterogeneity and strength of the lending and borrowing measures that reverses at a certain threshold. This shows that the size, number, and relative positional power of ethnic groups in a community affect households’ decision to lend and borrow from others in the community. Homogenous and moderate-to-highly-heterogeneous-communities are best able to pool risk.
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