Premium Benefits? A Heterogeneous Agent Model of Credit-Linked Index Insurance and Farm Technology Adoption
AbstractLack of protection from downside risk has been posited as one explanation for sluggish technology uptake among subsistence agricultural households in the developing world. Access to credit and insurance is thought to be a stimulant to technology adoption where new methods are riskier but higher yielding on average, or, in the alternative, require sunk costs of investment that can be significant for households that already consume very little when harvests are poor. Despite recent efforts to pilot index-based insurance to smallholder farmers where no formal insurance was previously available, demand for individual-level contracts has been unexceptional at best, even when premiums are highly subsidized. On the flip side, the effect of index insurance on credit supply is ambiguous: if clients are insured against potential losses, theory suggests that credit supply should increase, as banks face lower probabilities of systemic default; however, due in part to the nature of basis risk that is inherent in index-based contracts, there are cases in which mandatory index insurance that indemnifies the policyholder directly can lead to decreased internal rates of return for lending institutions. In this paper, we employ a dynamic, stochastic, heterogeneous agent model where farm households have access to contingent credit or credit-linked insurance, and may also make dichotomous choices regarding technology and loan repayment in each period. The approach we take is novel in that insurance is modeled as a meso-level product, where the bank is first indemnified before any payouts are distributed to its borrowing clients. Thus, the model we put forward takes into account both supply- and demand-side concerns, and shows the possibilities of a trickle-down effect when index insurance contracts are sold not to individual households, but instead to risk aggregators for whom basis risk is lower. Results show that insurance can have a positive effect on technology uptake, while letting the lender lay first claim on indemnities lowers default rates.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Agricultural and Applied Economics Association in its series 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. with number 149666.
Date of creation: 2013
Date of revision:
Contact details of provider:
Postal: 555 East Wells Street, Suite 1100, Milwaukee, Wisconsin 53202
Phone: (414) 918-3190
Fax: (414) 276-3349
Web page: http://www.aaea.org
More information through EDIRC
Agricultural and Food Policy; Agricultural Finance; Risk and Uncertainty;
This paper has been announced in the following NEP Reports:
- NEP-AGR-2013-06-24 (Agricultural Economics)
- NEP-ALL-2013-06-24 (All new papers)
- NEP-IAS-2013-06-24 (Insurance Economics)
- NEP-MFD-2013-06-24 (Microfinance)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mark Rosenzweig & Andrew D. Foster, 1995.
"Imperfect Commitment, Altruism, and the Family: Evidence from Transfer Behavior in Low-Income Rural Areas,"
_075, University of Pennsylvania.
- Andrew D. Foster & Mark R. Rosenzweig, 2001. "Imperfect Commitment, Altruism, And The Family: Evidence From Transfer Behavior In Low-Income Rural Areas," The Review of Economics and Statistics, MIT Press, vol. 83(3), pages 389-407, August.
- Barry J. Barnett & Olivier Mahul, 2007. "Weather Index Insurance for Agriculture and Rural Areas in Lower-Income Countries," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(5), pages 1241-1247.
- Kazianga, Harounan & Udry, Christopher, 2006.
"Consumption smoothing? Livestock, insurance and drought in rural Burkina Faso,"
Journal of Development Economics,
Elsevier, vol. 79(2), pages 413-446, April.
- Harounan Kazianga & Christopher Udry, 2004. "Consumption Smoothing? Livestock, Insurance and Drought in Rural Burkina Faso," Working Papers 898, Economic Growth Center, Yale University.
- Roberts, Michael J. & O'Donoghue, Erik J. & Key, Nigel D., 2007. "Does Crop Insurance Affect Crop Yields?," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 9828, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
- Gine, Xavier & Yang, Dean, 2007.
"Insurance, credit, and technology adoption : field experimental evidence from Malawi,"
Policy Research Working Paper Series
4425, The World Bank.
- 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.
- Carter, Michael R. & Galarza, Francisco & Boucher, Stephen, 2007. "Underwriting area-based yield insurance to crowd-in credit supply and demand," MPRA Paper 24326, University Library of Munich, Germany.
- Zimmerman, Frederick J. & Carter, Michael R., 2003.
"Asset smoothing, consumption smoothing and the reproduction of inequality under risk and subsistence constraints,"
Journal of Development Economics,
Elsevier, vol. 71(2), pages 233-260, August.
- Frederic Zimmerman & MICHAEL R. CARTER, . "Asset Smoothing, Consumption Smoothing and the Reproduction for Inequality under Risk and Subsistence Constraints," Wisconsin-Madison Agricultural and Applied Economics Staff Papers 402, Wisconsin-Madison Agricultural and Applied Economics Department.
- Janzen, Sarah A. & Carter, Michael R. & Ikegami, Munenobu, 2012. "Valuing Asset Insurance in the Presence of Poverty Traps: A Dynamic Approach," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124805, Agricultural and Applied Economics Association.
- Larson, Donald F. & Plessmann, Frank, 2009. "Do farmers choose to be inefficient? Evidence from Bicol," Journal of Development Economics, Elsevier, vol. 90(1), pages 24-32, September.
- Marcel Fafchamps & Chris Udry & Katherine Czukas, .
"Drought and Saving in West Africa: Are Livestock a Buffer Stock?,"
97013, Stanford University, Department of Economics.
- Fafchamps, Marcel & Udry, Christopher & Czukas, Katherine, 1998. "Drought and saving in West Africa: are livestock a buffer stock?," Journal of Development Economics, Elsevier, vol. 55(2), pages 273-305, April.
- Jalan, Jyotsna & Ravallion, Martin, 1999.
"Are the poor less well insured? Evidence on vulnerability to income risk in rural China,"
Journal of Development Economics,
Elsevier, vol. 58(1), pages 61-81, February.
- Jalan, Jyotsna & Ravallion, Martin, 1997. "Are the poor less well-insured? Evidence on vulnerability to income risk in rural China," Policy Research Working Paper Series 1863, The World Bank.
- 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.
- 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.
- Mario J. Miranda & Claudio Gonzalez-Vega, 2010. "Systemic Risk, Index Insurance, and Optimal Management of Agricultural Loan Portfolios in Developing Countries," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(2), pages 399-406.
- 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.
- Eswaran, Mukesh & Kotwal, Ashok, 1989. "Credit as insurance in agrarian economies," Journal of Development Economics, Elsevier, vol. 31(1), pages 37-53, July.
- Daniel Clarke & Sefan Dercon, 2009. "Insurance, Credit and Safety Nets for the Poor in a World of Risk," Working Papers 81, United Nations, Department of Economics and Social Affairs.
- Matthew Jowett, 2003. "Do informal risk sharing networks crowd out public voluntary health insurance? Evidence from Vietnam," Applied Economics, Taylor & Francis Journals, vol. 35(10), pages 1153-1161.
- Anjini Kochar, 1999. "Smoothing Consumption by Smoothing Income: Hours-of-Work Responses to Idiosyncratic Agricultural Shocks in Rural India," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 50-61, February.
- Dean Karlan & Ed Kutsoati & Margaret McMillan & Chris Udry, 2011. "Crop Price Indemnified Loans for Farmers: A Pilot Experiment in Rural Ghana," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 78(1), pages 37-55, 03.
- Lybbert, Travis J. & McPeak, John, 2012. "Risk and intertemporal substitution: Livestock portfolios and off-take among Kenyan pastoralists," Journal of Development Economics, Elsevier, vol. 97(2), pages 415-426.
- Jerry R. Skees & J. Roy Black & Barry J. Barnett, 1997. "Designing and Rating an Area Yield Crop Insurance Contract," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 430-438.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search).
If references are entirely missing, you can add them using this form.