Poor households are especially vulnerable to severe income fluctuations such as weather and health shocks. Coping with these shocks is especially costly in developing countries, since households often lack access to formal insurance and credit markets. These households frequently cope with income fluctuations using transfers and gifts from other households. This dissertation examines the mechanisms underlying this informal risk sharing.Poor households are relatively well insured against idiosyncratic risk despite the prevalence of information and enforcement problems. Social connections may help to sustain cooperation between households and improve risk sharing. Using a laboratory experiment implemented with residents of a slum in Kenya, the first dissertation chapter examines whether social ties affect informal risk sharing when there is imperfect monitoring of effort. In addition to risk sharing motives, transfers between poor households in developing countries may occur for a variety of other motives. My second chapter compares the relative importance of social preferences, specifically altruism and inequality aversion, social proximity, bargaining weights, and risk preferences on sharing in an experiment with risk sharing games. My third chapter examines how well households in rural Mexico smooth consumption against idiosyncratic income shocks, specifically illnesses, natural disasters, and cash transfers from a government program.The results speak to whether the efficiency of social insurance and poverty alleviation programs could be improved if policymakers take into account the different levels of spillovers due to sharing within the village network.
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