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Risk, Credit, and Insurance in Peru: Field Experimental Evidence

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  • Galarza, Francisco

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, controling for choices made in the baseline game, covariate shocks experienced earlier, and previous rounds' winnings, we find that the decision to take the insured loan (uninsured loan) rather than any of the other two projects is predicted by wealth and lower (higher) levels of risk aversion. Interestingly, this relationship with risk aversion continues to hold when we control for the overweighting of low-probability events observed in the data.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17833.

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Date of creation: Aug 2009
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Handle: RePEc:pra:mprapa:17833

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Keywords: area-yield insurance; credit; covariate risk; idiosyncratic risk; risk aversion; probability weighting; experimental economics; Peru;

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References

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  1. Glenn W. Harrison & John A. List, 2004. "Field Experiments," Journal of Economic Literature, American Economic Association, vol. 42(4), pages 1009-1055, December.
  2. Gine, Xavier & Townsend, Robert & Vickery, James, 2007. "Patternsof rainfall insurance participation in rural India," Policy Research Working Paper Series 4408, The World Bank.
  3. Stephen R. Boucher & Michael R. Carter & Catherine Guirkinger, 2008. "Risk Rationing and Wealth Effects in Credit Markets: Theory and Implications for Agricultural Development," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(2), pages 409-423.
  4. 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.
  5. Gine, Xavier & Jakiela, Pamela & Karlan, Dean & Morduch, Jonathan, 2006. "Microfinance games," Policy Research Working Paper Series 3959, The World Bank.
  6. Shawn Cole & Xavier Gine & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2013. "Barriers to Household Risk Management: Evidence from India," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 104-35, January.
  7. Jonathan Morduch, 1995. "Income Smoothing and Consumption Smoothing," Harvard Institute of Economic Research Working Papers 1727, Harvard - Institute of Economic Research.
  8. Abhijit V. Banerjee & Esther Duflo, 2008. "The Experimental Approach to Development Economics," NBER Working Papers 14467, National Bureau of Economic Research, Inc.
  9. 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.
  10. Travis Lybbert, 2006. "Indian farmers' valuation of yield distributions: Will poor farmers value 'pro-poor' seeds?," Framed Field Experiments 00187, The Field Experiments Website.
  11. Offerman, T.J.S. & Sonnemans, J., 1997. "What's Causing Overreaction? An Experimental Investigation of Recency and the Hot Hand Effect," Discussion Paper 1997-36, Tilburg University, Center for Economic Research.
  12. Galarza, Francisco B., 2009. "Choices under Risk in Rural Peru," Staff Paper Series 542, University of Wisconsin, Agricultural and Applied Economics.
  13. Levy, Haim & Levy, Moshe, 2002. " Arrow-Pratt Risk Aversion, Risk Premium and Decision Weights," Journal of Risk and Uncertainty, Springer, vol. 25(3), pages 265-90, November.
  14. Gine, Xavier & Yang, Dean, 2007. "Insurance, credit, and technology adoption : field experimental evidence from Malawi," Policy Research Working Paper Series 4425, The World Bank.
  15. 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.
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Cited by:
  1. Galarza, Francisco B., 2009. "Choices under Risk in Rural Peru," Staff Paper Series 542, University of Wisconsin, Agricultural and Applied Economics.
  2. Mullally, Conner & Boucher, Stephen R. & Carter, Michael R., 2010. "Perceptions and Participation: Mistaken Beliefs, Encouragement Designs, and Demand for Index Insurance," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61002, Agricultural and Applied Economics Association.

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