An Experimental Analysis of Group Size and Risk Sharing

This study uses an insurance game to compare the behavior of small groups with that of large ones. The study implements a multi-period game, with the following features:

• In each period, subjects in small and large groups get either a high or a low endowment with equal probability;
• Subjects experience an aggregate uncertainty with the number of people who get a high or low endowment;
• Subjects can fully insure their earnings against individual uncertainty by placing their entire endowment in a group account in each period;
• Total amount in the group account is distributed equally among all group members.

Study results are contrary to economic theory that suggest larger the group, higher the per capita utility from risk sharing, contributions to the group account are significantly lower in large groups compared to that in small groups. Contribution levels are never close to what the insurance game predicts, possibly because agents fail to fully realize benefits of contribution to the pool when they receive a high endowment. While long run benefits of contributing to the pool can be substantial, short run returns are less so, especially for large groups.