We present a theoretical model which shows how households can insure through formal contracts and informal contracts when some verifiable production takes place in an environment of incomplete markets.\ We construct a theoretical setting which nests the case of complete markets when all risks can be insured by formal contracts (because all states of nature would be verifiable) and the case where only informal agreements are available (agreements specifying informal transfers that needs to be self-enforceable). We derive two equations of interest, an Euler-type equation and an equation of determination of the formal contract.\ We then study the semi-parametric identification of the model and show how it can be estimated. We estimate both equations using data of village economies in Pakistan. Empirical results are consistent with the model.