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Barriers to Household Risk Management

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Author Info

  • Robert M. Townsend
  • Shawn Cole
  • Jeremy Tobacman
  • Xavier Gine
  • 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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/195.

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Length: 43
Date of creation: 01 Jul 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/195

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Related research

Keywords: Household credit; Risk management; insurance contracts; insurance policies; risk aversion; basis risk; insurance policy; insurance contract; moral hazard; insurance markets; life insurance; crop insurance; microinsurance; imperfect information; emerging markets; risk sharing; insurance companies; changes in contract; indemnity insurance; economic risks; underwriters; credit risk; legal protections; consumer protection; insurance coverage; financial contract; risk taking; liability insurance; agricultural insurance; homeowners insurance; insurance products; insurance underwriters; risk diversification; earthquake insurance; insurance premium; reinsurance;

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References

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  1. Andreas Fuster & Paul S. Willen, 2011. "Insuring Consumption Using Income-Linked Assets," Review of Finance, European Finance Association, vol. 15(4), pages 835-873.
  2. Esther Duflo & Michael Kremer & Jonathan Robinson, 2009. "Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya," NBER Working Papers 15131, National Bureau of Economic Research, Inc.
  3. 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.
  4. Hans Binswanger, 1980. "Attitudes toward risk: Experimental measurement in rural india," Artefactual Field Experiments 00009, The Field Experiments Website.
  5. John Cawley & Tomas Philipson, 1997. "An Empirical Examination of Information Barriers to Trade inInsurance," University of Chicago - George G. Stigler Center for Study of Economy and State 132, Chicago - Center for Study of Economy and State.
  6. Shiller, Robert J., 2008. "Derivatives Markets for Home Prices," Working Papers 46, Yale University, Department of Economics.
  7. Szeidl, Adam & Rosenblat, Tanya & Mobius, Markus & Karlan, Dean, 2009. "Trust and Social Collateral," Scholarly Articles 3051620, Harvard University Department of Economics.
  8. Babbel, David F, 1985. " The Price Elasticity of Demand for Whole Life Insurance," Journal of Finance, American Finance Association, vol. 40(1), pages 225-39, March.
  9. Gine, Xavier & Townsend, Robert & Vickery, James, 2007. "Patternsof rainfall insurance participation in rural India," Policy Research Working Paper Series 4408, The World Bank.
  10. 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.
  11. Daniel J. Clarke, 2011. "A Theory of Rational Demand for Index Insurance," Economics Series Working Papers 572, University of Oxford, Department of Economics.
  12. 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.
  13. Seema Jayachandran, 2005. "Selling Labor Low: Wage Responses to Productivity Shocks in Developing Countries," UCLA Economics Online Papers 370, UCLA Department of Economics.
  14. Doherty, Neil A & Schlesinger, Harris, 1990. "Rational Insurance Purchasing: Consideration of Contract Nonperformance," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 243-53, February.
  15. 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.
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