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Risk Preferences and Demand for Insurance in Peru: A Field Experiment

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Author Info

  • Francisco Galarza

    ()
    (Departamento de Economía, Universidad del Pacífico)

  • Michael Carter

    ()
    (Departamento de Economía, Universidad del Pacífico)

Abstract

"This paper reports the results of behavioral economic experiments conducted in Peru to examine the relationship amongst risk preferences, loan take-up, and insurance purchase decisions. This area-based yield insurance can help reduce people's vulnerability to large scale covariate shocks, and can also lower the loan default probability under extreme negative covariate shocks. In a context of collateralized formal credit markets, we provide suggestive evidence that insurance may help reduce the fear of losing collateral that prevents potential borrowers from taking loans. Framing these experiments to recreate a real life situation, we started with a Baseline Game where subjects had to choose between a fallback production project and an uninsured loan. We then introduced a third project choice, loan with yield insurance (Insurance Game), which allows us to measure the effect of introducing insurance on the demand for loans. Overall, more than 50 percent of the subjects are willing to buy insurance in this insurance game. Further, controlling for the number of peers in the agricultural network, wealth, and choices made in the baseline game, we find that the project choice decision is predicted by a judgment bias known as hot-hand effect, and risk aversion. In the latter case, the shape of the relationship is quadratic, meaning that highly risk averse subjects will prefer switching to the risky, uninsured loan project, while those showing a low and moderate risk aversion will stick to the safer (fallback or insured loan) projects."

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Bibliographic Info

Paper provided by Departamento de Economía, Universidad del Pacífico in its series Working Papers with number 11-08.

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Length: 36 pages
Date of creation: Jan 2011
Date of revision: Jan 2011
Handle: RePEc:pai:wpaper:11-08

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Web page: http://www.up.edu.pe/
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Related research

Keywords: Area-yield insurance; Credit; Covariate risk; Idiosyncratic risk; Risk aversion; Experimental economics; Peru;

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References

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  1. Xavier Giné & Robert Townsend & James Vickery, 2008. "Patterns of Rainfall Insurance Participation in Rural India," World Bank Economic Review, World Bank Group, vol. 22(3), pages 539-566, October.
  2. Jonathan Morduch, 1995. "Income Smoothing and Consumption Smoothing," Harvard Institute of Economic Research Working Papers 1727, Harvard - Institute of Economic Research.
  3. Banerjee, Abhijit & Duflo, Esther, 2008. "The Experimental Approach to Development Economics," CEPR Discussion Papers 7037, C.E.P.R. Discussion Papers.
  4. Shawn Cole & Xavier Giné & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2009. "Barriers to household risk management: evidence from India," Staff Reports 373, Federal Reserve Bank of New York.
  5. 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.
  6. Feder, Gershon, 1980. "Farm Size, Risk Aversion and the Adoption of New Technology under Uncertainty," Oxford Economic Papers, Oxford University Press, vol. 32(2), pages 263-83, July.
  7. Xavier Gin� & Pamela Jakiela & Dean Karlan & Jonathan Morduch, 2010. "Microfinance Games," American Economic Journal: Applied Economics, American Economic Association, vol. 2(3), pages 60-95, July.
  8. Gine, Xavier & Yang, Dean, 2007. "Insurance, credit, and technology adoption : field experimental evidence from Malawi," Policy Research Working Paper Series 4425, The World Bank.
  9. Galarza, Francisco, 2009. "Choices under Risk in Rural Peru," MPRA Paper 17708, University Library of Munich, Germany.
  10. Glenn W. Harrison & John A. List, 2004. "Field Experiments," Journal of Economic Literature, American Economic Association, vol. 42(4), pages 1009-1055, December.
  11. Robert M. Townsend & Shawn Cole & Jeremy Tobacman & Xavier Gine & James Ian Vickery & Petia Topalova, 2012. "Barriers to Household Risk Management," IMF Working Papers 12/195, International Monetary Fund.
  12. Travis Lybbert, 2006. "Indian farmers' valuation of yield distributions: Will poor farmers value 'pro-poor' seeds?," Framed Field Experiments 00187, The Field Experiments Website.
  13. repec:feb:artefa:0092 is not listed on IDEAS
  14. Juan Camilo Cardenas & Jeffrey P. Carpenter, 2005. "Experiments and Economic Development: Lessons from Field Labs in the Developing World," Middlebury College Working Paper Series 0505, Middlebury College, Department of Economics.
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Citations

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Cited by:
  1. Elabed, Ghada & Carter, Michael R., 2013. "Basis Risk and Compound-Risk Aversion: Evidence from a WTP Experiment in Mali," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150353, Agricultural and Applied Economics Association.
  2. Eling, Martin & Pradhan, Shailee & Schmit, Joan T., 2013. "The Determinants of Microinsurance Demand," Working Papers on Finance 1308, University of St. Gallen, School of Finance.
  3. Ginger Turner & Farah Said & Uzma Afzal, 2014. "Microinsurance Demand After a Rare Flood Event: Evidence From a Field Experiment in Pakistan," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 39(2), pages 201-223, April.
  4. Coble, Keith H. & Barnett, Barry J. & Riley, John Michael, 2013. "Challenging Belief in the Law of Small Numbers," 2013 AAEA: Crop Insurance and the Farm Bill Symposium, October 8-9, Louisville, KY 156958, Agricultural and Applied Economics Association.

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