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Valuing Asset Insurance in the Presence of Poverty Traps: A Dynamic Approach

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Author Info

  • Janzen, Sarah A.
  • Carter, Michael R.
  • Ikegami, Munenobu

Abstract

Ample evidence exists to suggest that nonlinear asset dynamics can give rise to an environment of poverty traps. When dynamic asset thresholds matter, risk not only affects households ex post, but it also influences ex ante behavior. In this environment some house-holds may have much to gain from a productive safety net which prevents asset levels from dipping below the Micawber threshold. Insurance is a market-based mechanism that can act as a safety net, improving the risk management strategies available to vulnerable households. In this paper we use dynamic programming methods to assess whether vulnerable households will `self-select' into an asset insurance scheme. We show that while such households opti- mally insure at low levels, insurance serves to crowd in additional investment, causing a shift in the Micawber threshold. This investment comes from the hope of reduced vulnerability that insurance offers in the future. Finally, we use our model to make predictions about the value of index-based livestock insurance (IBLI) in Marsabit district of northern Kenya. Our results suggest that the behavioral changes brought about by insurance may result in decreased poverty levels over time.

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Bibliographic Info

Paper provided by Agricultural and Applied Economics Association in its series 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington with number 124805.

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Date of creation: 2012
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Handle: RePEc:ags:aaea12:124805

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Related research

Keywords: Food Security and Poverty; Livestock Production/Industries; Risk and Uncertainty;

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References

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  1. Christopher Barrett & Paswel Phiri Marenya & John Mcpeak & Bart Minten & Festus Murithi & Willis Oluoch-Kosura & Frank Place & Jean Claude Randrianarisoa & Jhon Rasambainarivo & Justine Wangila, 2006. "Welfare dynamics in rural Kenya and Madagascar," Journal of Development Studies, Taylor & Francis Journals, vol. 42(2), pages 248-277.
  2. Stefan Dercon, 1996. "Wealth, risk and activity choices: cattle in Western Tanzania," Economics Series Working Papers WPS/1996-08, University of Oxford, Department of Economics.
  3. Hongbin Cai & Yuyu Chen & Hanming Fang & Li-An Zhou, 2009. "Microinsurance, Trust and Economic Development: Evidence from a Randomized Natural Field Experiment," PIER Working Paper Archive 09-034, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  4. Sommarat Chantarat & Christopher B. Barrett & Andrew G. Mude & Calum G. Turvey, 2007. "Using Weather Index Insurance to Improve Drought Response for Famine Prevention," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(5), pages 1262-1268.
  5. John G. McPeak & Christopher B. Barrett, 2001. "Differential Risk Exposure and Stochastic Poverty Traps Among East African Pastoralists," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 674-679.
  6. Francisca Antman & David McKenzie, 2007. "Poverty traps and nonlinear income dynamics with measurement error and individual heterogeneity," Journal of Development Studies, Taylor & Francis Journals, vol. 43(6), pages 1057-1083.
  7. Lybbert, Travis J. & Barrett, Christopher B. & Desta, Solomon & Coppock, D. Layne, 2002. "Stochastic Wealth Dynamics And Risk Management Among A Poor Population," Working Papers 14736, Cornell University, Department of Applied Economics and Management.
  8. Michelle Adato & Michael Carter & Julian May, 2006. "Exploring poverty traps and social exclusion in South Africa using qualitative and quantitative data," Journal of Development Studies, Taylor & Francis Journals, vol. 42(2), pages 226-247.
  9. Francesca de Nicola, 2011. "The Impact of Weather Insurance on Consumption, Investment, and Welfare," 2011 Meeting Papers 548, Society for Economic Dynamics.
  10. Travis J. Lybbert & Christopher B. Barrett, 2011. "RiskÔÇÉTaking Behavior In The Presence Of Nonconvex Asset Dynamics," Economic Inquiry, Western Economic Association International, vol. 49(4), pages 982-988, October.
  11. Michael Carter & Christopher Barrett, 2006. "The economics of poverty traps and persistent poverty: An asset-based approach," Journal of Development Studies, Taylor & Francis Journals, vol. 42(2), pages 178-199.
  12. Lokshin Michael & Ravallion Martin, 2004. "Household Income Dynamics in Two Transition Economies," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 8(3), pages 1-33, September.
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  15. Barrett, Christopher B. & Swallow, Brent M., 2006. "Fractal poverty traps," World Development, Elsevier, vol. 34(1), pages 1-15, January.
  16. John Hoddinott, 2006. "Shocks and their consequences across and within households in Rural Zimbabwe," Journal of Development Studies, Taylor & Francis Journals, vol. 42(2), pages 301-321.
  17. Travis J. Lybbert & Christopher B. Barrett, 2007. "Risk Responses to Dynamic Asset Thresholds ," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 29(3), pages 412-418.
  18. Santos, Paulo & Barrett, Christopher B., 2011. "Persistent poverty and informal credit," Journal of Development Economics, Elsevier, vol. 96(2), pages 337-347, November.
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Cited by:
  1. Janzen, Sarah A. & Carter, Michael R., 2013. "The Impact of Microinsurance on Consumption Smoothing and Asset Protection: Evidence from a Drought in Kenya," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 151141, Agricultural and Applied Economics Association.
  2. Farrin, Kathleen M. & Miranda, Mario J., 2013. "Premium Benefits? A Heterogeneous Agent Model of Credit-Linked Index Insurance and Farm Technology Adoption," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149666, Agricultural and Applied Economics Association.

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