Selling Formal Insurance to the Informally Insured

Working Papers from Economic Growth Center, Yale University

Abstract: Unpredictable rainfall is an important risk for agricultural activity, and farmers in developing countries often receive incomplete insurance from informal risk-sharing networks. We study the demand for, and effects of, offering formal index-based rainfall insurance through a randomized experiment in an environment where the informal risk sharing network can be readily identified and richly characterized: sub-castes in rural India. A model allowing for both idiosyncratic and aggregate risk shows that informal networks lower the demand for formal insurance only if the network indemnifies against aggregate risk, but not if its primary role is to insure against farmer-specific losses. When formal insurance carries basis risk (mismatches between payouts and actual losses due to the remote location of the rainfall gauge), informal risk sharing that covers idiosyncratic losses enhance the benefits of index insurance. Formal index insurance enables households to take more risk even in the presence of informal insurance. We find substantial empirical support of these nuanced predictions of the model by conducting the experiment (randomizing both index insurance offers, and the locations of rainfall gauges) on castes for whom we have a rich history of group responsiveness to household and aggregate rainfall shocks.

Keywords: index insurance; risk sharing; basis risk (search for similar items in EconPapers)
JEL-codes: O13 O16 O17 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2012-02
New Economics Papers: this item is included in nep-agr, nep-dev and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (122)

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Working Paper: Selling formal Insurance to the Informally Insured (2012)
Working Paper: Selling Formal Insurance to the Informally Insured (2012)
Working Paper: Selling Formal Insurance to the Informally Insured (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:egc:wpaper:1007

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