Is informal risk-sharing less e/ective for the poor? Risk externalities and moral hazard in mutual insurance Matthieu Delpierre  , Bertrand Verheyden y and StØphanie Weynants zx August 17, 2015 Abstract Poor farm-households are less keen to adopt high risk/high return technologies than rich households. Yet, the poor are more vulnerable to income shocks. We develop a model of endogenous risk-taking to explain these facts. In autarky, poor households adopt less risky production plans and obtain lower expected returns, but face higher relative risk than the rich. The introduction of risk-sharing generates negative risk externalities between agents. At the rst best, the social planner imposes a homogeneous level of risk-taking in the group. At the second best, risk-taking is not enforceable and increases with insurance, generating moral hazard. Interestingly, the poors risk-taking behavior is more sensitive to insurance. The social planner thus mitigates risk-taking by applying a lower insurance coverage in poor groups. The introduction of risk-sharing therefore reinforces the gap between rich and poor in terms of expected income and absolute risk, while the e/ect on relative risk is ambiguous.  Marie Curie Fellow at LISER, Luxembourg and Earth and Life Institute, UniversitØ catholique de Louvain, Belgium; corresponding author, MatthieuDelpierreG@gmail.com y LISER, Luxembourg z University of Namur, Belgium x The authors are grateful to FrØdØric Gaspart, Jean-Philippe Platteau, Stefan Dercon, Pierre Dubois, Bruno Henry de Frahan, Tessa Bold, Fabrice Valognes, Anne-Claire Thomas, Philippe Van Kerm, Steve Boucher, Michael Carter, Arnaud Dupuy and two anonymous referees of the Journal of Development Economics for helpful comments and suggestions. The paper has also beneted from presentations at University of Louvain, the CSAE conference in Oxford, the DIAL conference in Paris and the EAAE conference in Dublin. 1