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Selling Formal Insurance to the Informally Insured

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  • A. Mushfiq Mobarak

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  • Mark Rosenzweig

Abstract

Unpredictable rainfall is an important risk for agricultural activity, and farmers in developing countries often receive incomplete insurance from informal risk-sharing networks. The demand for, and effects of, offering formal index-based rainfall insurance is studied 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. [BREAD Working Paper No. 322]. URL:[http://ipl.econ.duke.edu/bread/papers/working/322.pdf].

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Bibliographic Info

Paper provided by eSocialSciences in its series Working Papers with number id:4777.

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Date of creation: Feb 2012
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Handle: RePEc:ess:wpaper:id:4777

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Keywords: Formal Insurance; Informally; rural India; farmer-specific losses; rainfall gauges; households; agriculture; livelihoods; sources; weather-related; production risks; Indian workforce; poor; rural population; credit; insurance markets; risk; researchers; agricultural technology; increase productivity; caste-level linear variables; village; caste; Idiosyncratic;

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  1. Maurizio Mazzocco & Shiv Saini, 2012. "Testing Efficient Risk Sharing with Heterogeneous Risk Preferences," American Economic Review, American Economic Association, vol. 102(1), pages 428-68, February.
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  12. Coate, Stephen & Ravallion, Martin, 1993. "Reciprocity without commitment : Characterization and performance of informal insurance arrangements," Journal of Development Economics, Elsevier, vol. 40(1), pages 1-24, February.
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Cited by:
  1. Baez, Javier E. & Kronick, Dorothy & Mason, Andrew D., 2013. "Rural households in a changing climate," Policy Research Working Paper Series 6326, The World Bank.

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