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Insurance versus Savings for the Poor: Why One Should Offer Either Both or None

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Author Info

  • Landmann, Andreas

    ()
    (University of Mannheim)

  • Vollan, Björn

    ()
    (University of Mannheim)

  • Frölich, Markus

    ()
    (University of Mannheim)

Abstract

This paper analyzes data from a novel field experiment designed to test the impact of two different insurance products and a secret saving device on solidarity in risk-sharing groups among rural villagers in the Philippines. Risk is simulated by a lottery. Risk-sharing is possible in solidarity groups of three and insurance is introduced via less risky lotteries. Our main hypothesis is that formal market-based products lead to lower voluntary transfers among network members. We also test for the persistence of this crowding-out of solidarity. We find evidence for a reduction of solidarity by insurance if shocks are observable. Depending on insurance design, there is also evidence for persistence of this effect even if insurance is removed. Simulations using our regression results show that the benefits of insurance are completely offset by the reduction in transfers. However, if secret saving is possible solidarity is very low in general and there is no crowding out effect of insurance. This suggests that introducing formal insurance is not as effective as it is hoped for when the monetary situation can be closely monitored, but that it might be a very important complement when savings inhibit observing financial resources. The implication for policy is that microsavings should be offered simultaneously with microinsurance.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6298.

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Length: 59 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:iza:izadps:dp6298

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Related research

Keywords: insurance; savings; informal risk sharing; crowding out; field lab experiment; Philippines;

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References

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  1. Marcel Fafchamps & Flore Gubert, 2005. "The Formation of Risk Sharing Networks," Working Papers, DIAL (Développement, Institutions et Mondialisation) DT/2005/13, DIAL (Développement, Institutions et Mondialisation).
  2. Petia Topalova & Shawn Cole & Xavier Gene & Jeremy Tobacman & Robert Townsend & James Vickery, 2011. "Barriers to Household Risk Management: Evidence from India," Working Papers id:4293, eSocialSciences.
  3. Marcel Fafchamps & Susan Lund, . "Risk Sharing Networks in Rural Philippines," Working Papers, Stanford University, Department of Economics 97014, Stanford University, Department of Economics.
  4. Abigail Barr & Garance Genicot, 2008. "Risk Sharing, Commitment, and Information: An Experimental Analysis," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(6), pages 1151-1185, December.
  5. Gine, Xavier & Yang, Dean, 2007. "Insurance, credit, and technology adoption : field experimental evidence from Malawi," Policy Research Working Paper Series 4425, The World Bank.
  6. Marcel Fafchamps & Margherita Comola, 2010. "Are Gifts and Loans between Households Voluntary?," Economics Series Working Papers CSAE WPS/2010-20, University of Oxford, Department of Economics.
  7. Nava Ashraf & Dean S. Karlan & Wesley Yin, 2005. "Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines," Working Papers, Economic Growth Center, Yale University 917, Economic Growth Center, Yale University.
  8. Brune, Lasse & Gine, Xavier & Goldberg, Jessica & Yang, Dean, 2011. "Commitments to save : a field experiment in rural Malawi," Policy Research Working Paper Series 5748, The World Bank.
  9. Emily Breza & Arun G. Chandrasekhar & Horacio Larreguy, 2014. "Social Structure and Institutional Design: Evidence from a Lab Experiment in the Field," NBER Working Papers 20309, National Bureau of Economic Research, Inc.
  10. Seiro ITO & Hisaki KONO, 2010. "Why Is The Take-Up Of Microinsurance So Low? Evidence From A Health Insurance Scheme In India," The Developing Economies, Institute of Developing Economies, vol. 48(1), pages 74-101.
  11. Nadja Trhal & Ralf Radermacher, 2006. "Bad luck vs. self-inflicted neediness – An experimental investigation of gift giving in a solidarity game," Working Paper Series in Economics, University of Cologne, Department of Economics 28, University of Cologne, Department of Economics, revised 07 Mar 2008.
  12. Juan Camilo Cardenas & Jeffrey Carpenter, 2008. "Behavioural Development Economics: Lessons from Field Labs in the Developing World," Journal of Development Studies, Taylor & Francis Journals, vol. 44(3), pages 311-338.
  13. Traxler, Christian, 2006. "Social Norms and Conditional Cooperative Taxpayers," Discussion Papers in Economics, University of Munich, Department of Economics 1202, University of Munich, Department of Economics.
  14. Pascaline Dupas & Jonathan Robinson, 2009. "Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya," NBER Working Papers 14693, National Bureau of Economic Research, Inc.
  15. Hoff, Karla & Sen, Arijit, 2005. "The kin system as a poverty trap?," Policy Research Working Paper Series 3575, The World Bank.
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Cited by:
  1. Florian Klohn & Christoph Strupat, 2013. "Crowding out of Solidarity? – Public Health Insurance versus Informal Transfer Networks in Ghana," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0432, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  2. Martin Eling & Shailee Pradhan & Joan T Schmit, 2014. "The Determinants of Microinsurance Demand," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 39(2), pages 224-263, April.

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