Nothing Special   »   [go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2012-195.html
   My bibliography  Save this paper

Barriers to Household Risk Management: Evidence from India

Author

Listed:
  • Robert M. Townsend
  • Ms. Shawn Cole
  • Mr. Jeremy Tobacman
  • Mr. Xavier Gine
  • Mr. James Ian Vickery
  • Petia Topalova
Abstract
Why do many households remain exposed to large exogenous sources of non-systematic income risk? We use a series of randomized field experiments in rural India to test the importance of price and non-price factors in the adoption of an innovative rainfall insurance product. Demand is significantly price sensitive, but widespread take-up would not be achieved even if the product offered a payout ratio comparable to U.S. insurance contracts. We present evidence suggesting that lack of trust, liquidity constraints and limited salience are significant non-price frictions that constrain demand. We suggest contract design improvements to mitigate these frictions.

Suggested Citation

  • Robert M. Townsend & Ms. Shawn Cole & Mr. Jeremy Tobacman & Mr. Xavier Gine & Mr. James Ian Vickery & Petia Topalova, 2012. "Barriers to Household Risk Management: Evidence from India," IMF Working Papers 2012/195, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2012/195
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=26132
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Esther Duflo & Michael Kremer & Jonathan Robinson, 2011. "Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya," American Economic Review, American Economic Association, vol. 101(6), pages 2350-2390, October.
    2. Youngjae Lim & Robert Townsend, 1998. "General Equilibrium Models of Financial Systems: Theory and Measurement in Village Economies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 59-118, January.
    3. Daniel J. Clarke, 2016. "A Theory of Rational Demand for Index Insurance," American Economic Journal: Microeconomics, American Economic Association, vol. 8(1), pages 283-306, February.
    4. repec:reg:rpubli:259 is not listed on IDEAS
    5. Carolyn Jenkins, 1997. "The politics of economic policy making in Zimbabwe after Independence," CSAE Working Paper Series 1997-13a, Centre for the Study of African Economies, University of Oxford.
    6. Reis, Ricardo, 2006. "Inattentive consumers," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1761-1800, November.
    7. John Y. Campbell & João F. Cocco, 2003. "Household Risk Management and Optimal Mortgage Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1449-1494.
    8. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2008. "Trusting the Stock Market," Journal of Finance, American Finance Association, vol. 63(6), pages 2557-2600, December.
    9. Hans P. Binswanger, 1980. "Attitudes Toward Risk: Experimental Measurement in Rural India," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 62(3), pages 395-407.
    10. Levon Barseghyan & Francesca Molinari & Ted O'Donoghue & Joshua C. Teitelbaum, 2013. "The Nature of Risk Preferences: Evidence from Insurance Choices," American Economic Review, American Economic Association, vol. 103(6), pages 2499-2529, October.
    11. Athanasoulis, Stefano G & Shiller, Robert J, 2000. "The Significance of the Market Portfolio," The Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 301-329.
    12. Sharon Maccini & Dean Yang, 2009. "Under the Weather: Health, Schooling, and Economic Consequences of Early-Life Rainfall," American Economic Review, American Economic Association, vol. 99(3), pages 1006-1026, June.
    13. Bertrand, Marianne & Karlan, Dean S. & Mullainathan, Sendhil & Shafir, Eldar & Zinman, Jonathan, 2005. "What's Psychology Worth? A Field Experiment in the Consumer Credit Market," Center Discussion Papers 28441, Yale University, Economic Growth Center.
    14. Lusardi, Annamaria & Mitchell, Olivia S., 2007. "Baby Boomer retirement security: The roles of planning, financial literacy, and housing wealth," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 205-224, January.
    15. Karlan, Dean & Kutsoati, Ed & McMillan, Margaret & Udry, Chris, 2010. "Crop price indemnified loans for farmers," IFPRI discussion papers 1021, International Food Policy Research Institute (IFPRI).
    16. Xavier Giné & Robert Townsend & James Vickery, 2007. "Statistical Analysis of Rainfall Insurance Payouts in Southern India," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(5), pages 1248-1254.
    17. Hongbin Cai & Yuyu Chen & Hanming Fang & Li-An Zhou, 2009. "Microinsurance, Trust and Economic Development: Evidence from a Randomized Natural Field Experiment," NBER Working Papers 15396, National Bureau of Economic Research, Inc.
    18. Dean Karlan & Markus Mobius & Tanya Rosenblat & Adam Szeidl, 2009. "Trust and Social Collateral," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(3), pages 1307-1361.
    19. Rosenzweig, Mark R & Binswanger, Hans P, 1993. "Wealth, Weather Risk and the Composition and Profitability of Agricultural Investments," Economic Journal, Royal Economic Society, vol. 103(416), pages 56-78, January.
    20. Harrison Hong & Jeffrey D. Kubik & Jeremy C. Stein, 2001. "Social Interaction and Stock-Market Participation," NBER Working Papers 8358, National Bureau of Economic Research, Inc.
    21. Stijn Van Nieuwerburgh & Laura Veldkamp, 2009. "Information Immobility and the Home Bias Puzzle," Journal of Finance, American Finance Association, vol. 64(3), pages 1187-1215, June.
    22. Andreas Fuster & Paul S. Willen, 2011. "Insuring Consumption Using Income-Linked Assets," Review of Finance, European Finance Association, vol. 15(4), pages 835-873.
    23. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    24. Hanming Fang & Michael P. Keane & Dan Silverman, 2008. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 303-350, April.
    25. Babbel, David F, 1985. "The Price Elasticity of Demand for Whole Life Insurance," Journal of Finance, American Finance Association, vol. 40(1), pages 225-239, March.
    26. Matilde Bombardini & Francesco Trebbi, 2012. "Risk Aversion And Expected Utility Theory: An Experiment With Large And Small Stakes," Journal of the European Economic Association, European Economic Association, vol. 10(6), pages 1348-1399, December.
    27. Shawn Cole & Thomas Sampson & Bilal Zia, 2011. "Prices or Knowledge? What Drives Demand for Financial Services in Emerging Markets?," Journal of Finance, American Finance Association, vol. 66(6), pages 1933-1967, December.
    28. Gin, Xavier & Yang, Dean, 2009. "Insurance, credit, and technology adoption: Field experimental evidencefrom Malawi," Journal of Development Economics, Elsevier, vol. 89(1), pages 1-11, May.
    29. Neil A. Doherty & Harris Schlesinger, 1990. "Rational Insurance Purchasing: Consideration of Contract Nonperformance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 243-253.
    30. Stefano G. Athanasoulis & Robert J. Shiller, 2001. "World Income Components: Measuring and Exploiting Risk-Sharing Opportunities," American Economic Review, American Economic Association, vol. 91(4), pages 1031-1054, September.
    31. Justin Wolfers & Eric Zitzewitz, 2004. "Prediction Markets," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 107-126, Spring.
    32. Esther Duflo & Christopher Udry, 2003. "Intrahousehold Resource Allocation in Côte D'ivoire: Social Norms, Separate Accounts and Consumption Choices," Working Papers 857, Economic Growth Center, Yale University.
    33. Robert Cull & Asli Demirgüç-Kunt & Jonathan Morduch, 2009. "Microfinance Meets the Market," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 167-192, Winter.
    34. World Bank, 2005. "Managing Agricultural Production Risk : Innovations in Developing Countries," World Bank Publications - Reports 8797, The World Bank Group.
    35. Elaina Rose, 1999. "Consumption Smoothing and Excess Female Mortality in Rural India," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 41-49, February.
    36. repec:bla:jfinan:v:59:y:2004:i:1:p:137-163 is not listed on IDEAS
    37. Pierre-Andre Chiappori & Bernard Salanie, 2000. "Testing for Asymmetric Information in Insurance Markets," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 56-78, February.
    38. Stefan Dercon & Pramila Krishnan, 2000. "In Sickness and in Health: Risk Sharing within Households in Rural Ethiopia," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 688-727, August.
    39. Jaap H. Abbring & Pierre-André Chiappori & Jean Pinquet, 2003. "Moral Hazard and Dynamic Insurance Data," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 767-820, June.
    40. Harrison Hong & Jeffrey D. Kubik & Jeremy C. Stein, 2005. "Thy Neighbor's Portfolio: Word‐of‐Mouth Effects in the Holdings and Trades of Money Managers," Journal of Finance, American Finance Association, vol. 60(6), pages 2801-2824, December.
    41. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    42. Xavier Giné & Robert Townsend & James Vickery, 2008. "Patterns of Rainfall Insurance Participation in Rural India," The World Bank Economic Review, World Bank, vol. 22(3), pages 539-566, October.
    43. Annamarie Lusardi & Olivia S. Mitchell, 2005. "Financial Literacy and Planning: Implications for Retirement Wellbeing," Working Papers wp108, University of Michigan, Michigan Retirement Research Center.
    44. Jaap H. Abbring & Pierre-André Chiappori & Jean Pinquet, 2003. "Moral Hazard and Dynamic Insurance Data," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 767-820, June.
    45. Seema Jayachandran, 2006. "Selling Labor Low: Wage Responses to Productivity Shocks in Developing Countries," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 538-575, June.
    46. Mark V. Pauly & Kate H. Withers & Krupa Subramanian-Viswana & Jean Lemaire & John C. Hershey, 2003. "Price Elasticity of Demand for Term Life Insurance and Adverse Selection," NBER Working Papers 9925, National Bureau of Economic Research, Inc.
    47. Gine, Xavier & Menand, Lev & Townsend, Robert & Vickery, James, 2010. "Microinsurance : a case study of the Indian rainfall index insurance market," Policy Research Working Paper Series 5459, The World Bank.
    48. Robert J. Shiller, 2008. "Derivatives Markets for Home Prices," Cowles Foundation Discussion Papers 1648, Cowles Foundation for Research in Economics, Yale University.
    49. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 629-649.
    50. Harrison Hong & Jeffrey D. Kubik & Jeremy C. Stein, 2003. "The Neighbor's Portfolio: Word-of-Mouth Effects in the Holdings and Trade of Money Managers," NBER Working Papers 9711, National Bureau of Economic Research, Inc.
    51. Shiller, Robert J., 1998. "Macro Markets: Creating Institutions for Managing Society's Largest Economic Risks," OUP Catalogue, Oxford University Press, number 9780198294184.
    52. Marianne Bertrand & Dean Karlan & Sendhil Mullainathan & Eldar Shafir & Jonathan Zinman, 2010. "What's Advertising Content Worth? Evidence from a Consumer Credit Marketing Field Experiment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(1), pages 263-306.
    53. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
    54. Tomas Philipson & John Cawley, 1999. "An Empirical Examination of Information Barriers to Trade in Insurance," American Economic Review, American Economic Association, vol. 89(4), pages 827-846, September.
    55. Johnson, Eric J & Hershey, John & Meszaros, Jacqueline & Kunreuther, Howard, 1993. "Framing, Probability Distortions, and Insurance Decisions," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 35-51, August.
    56. Paxson, Christina H, 1992. "Using Weather Variability to Estimate the Response of Savings to Transitory Income in Thailand," American Economic Review, American Economic Association, vol. 82(1), pages 15-33, March.
    57. Dean S. Karlan & Jonathan Zinman, 2008. "Credit Elasticities in Less-Developed Economies: Implications for Microfinance," American Economic Review, American Economic Association, vol. 98(3), pages 1040-1068, June.
    58. Skees, Jerry R., 2008. "Innovations in Index Insurance for the Poor in Lower Income Countries," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 37(1), pages 1-15, April.
    59. Jonathan Morduch, 1995. "Income Smoothing and Consumption Smoothing," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 103-114, Summer.
    60. HwaJung Choi, 2007. "Are Remittances Insurance? Evidence from Rainfall Shocks in the Philippines," The World Bank Economic Review, World Bank, vol. 21(2), pages 219-248, May.
    61. Mittal, Vikas & Ross, William T., 1998. "The Impact of Positive and Negative Affect and Issue Framing on Issue Interpretation and Risk Taking," Organizational Behavior and Human Decision Processes, Elsevier, vol. 76(3), pages 298-324, December.
    62. Clarke,Daniel Jonathan & Mahul,Olivier & Rao,Kolli Nageswara & Verma,Niraj, 2012. "Weather based crop insurance in India," Policy Research Working Paper Series 5985, The World Bank.
    63. Adriano A. Rampini & S. Viswanathan, 2010. "Collateral, Risk Management, and the Distribution of Debt Capacity," Journal of Finance, American Finance Association, vol. 65(6), pages 2293-2322, December.
    64. Skees, Jerry R., 2008. "Innovations in Index Insurance for the Poor in Lower Income Countries," Agricultural and Resource Economics Review, Cambridge University Press, vol. 37(1), pages 1-15, April.
    65. Reis, Ricardo, 2006. "Inattentive consumers," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1761-1800, November.
    66. World Bank, 2005. "Managing Agricultural Production Risk : Innovations in Developing Countries," World Bank Publications - Reports 14434, The World Bank Group.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gine, Xavier & Menand, Lev & Townsend, Robert & Vickery, James, 2010. "Microinsurance : a case study of the Indian rainfall index insurance market," Policy Research Working Paper Series 5459, The World Bank.
    2. Shawn Cole & Xavier Giné & James Vickery, 2017. "How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment," The Review of Financial Studies, Society for Financial Studies, vol. 30(6), pages 1935-1970.
    3. Awel Y. & Azomahou T.T., 2015. "Risk preference or financial literacy? Behavioural experiment on index insurance demand," MERIT Working Papers 2015-005, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    4. Gunnsteinsson, Snaebjorn, 2020. "Experimental identification of asymmetric information: Evidence on crop insurance in the Philippines," Journal of Development Economics, Elsevier, vol. 144(C).
    5. Vieider, Ferdinand M. & Truong, Nghi & Martinsson, Peter & Pham Khanh Nam & Martinsson, Peter, 2013. "Risk preferences and development revisited: A field experiment in Vietnam," Discussion Papers, WZB Junior Research Group Risk and Development SP II 2013-403, WZB Berlin Social Science Center.
    6. Mobarak, A. Mushfiq & Rosenzweig, Mark R., 2012. "Selling formal Insurance to the Informally Insured," Center Discussion Papers 121671, Yale University, Economic Growth Center.
    7. Antoine Leblois & Philippe Quirion, 2013. "Agricultural insurances based on meteorological indices: realizations, methods and research challenges," Post-Print hal-00656778, HAL.
    8. Xavier Giné & Robert Townsend & James Vickery, 2008. "Patterns of Rainfall Insurance Participation in Rural India," The World Bank Economic Review, World Bank, vol. 22(3), pages 539-566, October.
    9. Michael R. CARTER & Alain de JANVRY & Elisabeth SADOULET & Alexandros SARRIS, 2014. "Index-based weather insurance for developing countries: A review of evidence and a set of propositions for up-scaling," Working Papers P111, FERDI.
    10. Glenn W. Harrison & Jia Min Ng, 2019. "Behavioral insurance and economic theory: A literature review," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(2), pages 133-182, July.
    11. Petraud, Jean & Boucher, Stephen & Carter, Michael, 2015. "Competing theories of risk preferences and the demand for crop insurance: Experimental evidence from Peru," 2015 Conference, August 9-14, 2015, Milan, Italy 211383, International Association of Agricultural Economists.
    12. Patrick S. Ward & David L. Ortega & David J. Spielman & Neha Kumar & Sumedha Minocha, 2020. "Demand for Complementary Financial and Technological Tools for Managing Drought Risk," Economic Development and Cultural Change, University of Chicago Press, vol. 68(2), pages 607-653.
    13. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1397-1532, Elsevier.
    14. Ward, Patrick S. & Kumar, Neha & De Nicola, Francesca & Hill, Ruth & Makhija, Simrin & Spielman, David J. & Magnan, Nicholas, 2017. "Insuring Against Drought: Evidence on Agricultural Intensification and Demand for Index Insurance from a Randomized Evaluation in Rural Bangladesh," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258090, Agricultural and Applied Economics Association.
    15. Fey, Jan-Christian & Schmeiser, Hato & Schreiber, Florian, 2024. "Optimal insurance deductibles under limited information," Journal of Economic Behavior & Organization, Elsevier, vol. 220(C), pages 202-221.
    16. Rampini, Adriano A. & Viswanathan, S., 2018. "Financing Insurance," CEPR Discussion Papers 12855, C.E.P.R. Discussion Papers.
    17. Takahashi, Kazushi & Ikegami, Munenobu & Sheahan, Megan & Barrett, Christopher B., 2016. "Experimental Evidence on the Drivers of Index-Based Livestock Insurance Demand in Southern Ethiopia," World Development, Elsevier, vol. 78(C), pages 324-340.
    18. Hill, Ruth Vargas & Kumar, Neha & Magnan, Nicholas & Makhija, Simrin & de Nicola, Francesca & Spielman, David J. & Ward, Patrick S., 2017. "Insuring against droughts: Evidence on agricultural intensification and index insurance demand from a randomized evaluation in rural Bangladesh," IFPRI discussion papers 1630, International Food Policy Research Institute (IFPRI).
    19. Lampe, Immanuel & Würtenberger, Daniel, 2020. "Loss aversion and the demand for index insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 678-693.
    20. B Kelsey Jack, "undated". "Market Inefficiencies and the Adoption of Agricultural Technologies in Developing Countries," CID Working Papers 50, Center for International Development at Harvard University.

    More about this item

    Keywords

    WP; Gujarat video experiment; product endorsement; financial product; insurance demand; expected return; Gujarat video treatment; payout slope; product diffusion; Insurance; Household Finance; Trust; Liquidity Constraints; Economic Development; Andhra Pradesh sample; Insurance companies; Consumption; Liquidity; Africa;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:2012/195. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akshay Modi (email available below). General contact details of provider: https://edirc.repec.org/data/imfffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.