Does Social Capital Reduce Moral Hazard? A Network Model for Non-Life Insurance Demand

We study the effect of social capital in an environment in which formal, marketed insurance contracts coexist with informal agreements. We show that in the absence of peer monitoring and social pressure, non-marketed contracts crowd out formal ones due to moral hazard. We prove, by means of an equilibrium concept typical of the network literature, that social capital can reduce moral hazard in informal agreements. We then show that under certain conditions, social capital increases the demand for marketed insurance contracts. The theoretical model we outline provides us clear guidance to measure social capital in a provincial-level data set. The empirical model, which is estimated controlling for panel and spatial structure, supports our claim that social capital increases the demand for non-life insurance.