Abstract
Households in developing countries commonly engage in risk sharing to cope with shocks. Despite this, the residual risk they remain exposed to - often due to aggregate events such as droughts and floods - is considerable. To mitigate these risks, governments, NGOs and multilateral organizations have introduced index insurance. To appreciate its welfare implications, however, it is necessary to assess how insurance interacts with pre-existing risk sharing. We ask to what extent the demand for index insurance - as compared to standard indemnity insurance - depends on the level of pre-existing risk sharing. We contribute by developing a simple theoretical framework which shows that, relative to a state of autarky, risk sharing between agents increases demand for index insurance and decreases demand for indemnity insurance. In an artefactual field experiment with Ethiopian farmers who share risk in real life, we test and confirm these predictions.
| Original language | English |
|---|---|
| Pages (from-to) | 236-256 |
| Number of pages | 21 |
| Journal | Journal of Economic Behavior and Organization |
| Volume | 195 |
| Early online date | 2 Feb 2022 |
| DOIs | |
| Publication status | Published - 1 Mar 2022 |
Bibliographical note
Funding Information:We are indebted to Tagel Gebrehiwot Gidey for research coordination. We are grateful for useful comments from Daniel Clarke, Stefan Dercon, Glenn Harrison, Mahreen Mahmud, Costas Meghir, Kalle Moene, Ollie Ramsey, Debraj Ray, Jim Roth, Elisabeth Sadoulet and audiences at the University of Bristol, the University of Kent, the 2017 CSAE conference, 2017 SEEDEC conference, and 2017 DIAL conference. This paper is an output of Improving Institutions for Pro-Poor Growth (iiG), a research programme funded by the UK Department for International Development. Views expressed are not necessarily those of the funder. Declarations of interest: none.
Funding Information:
We are indebted to Tagel Gebrehiwot Gidey for research coordination. We are grateful for useful comments from Daniel Clarke, Stefan Dercon, Glenn Harrison, Mahreen Mahmud, Costas Meghir, Kalle Moene, Ollie Ramsey, Debraj Ray, Jim Roth, Elisabeth Sadoulet and audiences at the University of Bristol, the University of Kent, the 2017 CSAE conference, 2017 SEEDEC conference, and 2017 DIAL conference. This paper is an output of Improving Institutions for Pro-Poor Growth (iiG), a research programme funded by the UK Department for International Development. Views expressed are not necessarily those of the funder. Declarations of interest: none.
Publisher Copyright:
© 2022 Elsevier B.V.
Research Groups and Themes
- ECON Applied Economics
- International Development
- ECON CEPS Welfare
Keywords
- risk sharing
- indemnity insurance
- index insurance
- artefactual field experiment
Access to Document
- Full-text PDF (accepted author manuscript)
This is the accepted author manuscript (AAM). The final published version (version of record) is available online via Elsevier at https://doi.org/10.1016/j.jebo.2021.12.035. Please refer to any applicable terms of use of the publisher.