IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Barriers to Household Risk Management: Evidence from India

  • Shawn Cole
  • Xavier Gine
  • Jeremy Tobacman
  • Petia Topalova
  • Robert Townsend
  • James Vickery

Why do many households remain exposed to large exogenous sources of nonsystematic income risk? We use a series of randomized field experiments in rural India to test the importance of price and nonprice 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 US insurance contracts. We present evidence suggesting that lack of trust, liquidity constraints, and limited salience are significant nonprice frictions that constrain demand. We suggest possible contract design improvements to mitigate these frictions. (JEL D14, D81, O12, O13, O16, O18, Q12)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.aeaweb.org/articles.php?doi=10.1257/app.5.1.104
Download Restriction: no

File URL: http://www.aeaweb.org/aej/app/data/2011-0326_data.zip
Download Restriction: no

File URL: http://www.aeaweb.org/aej/app/app/2011-0326_app.pdf
Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.

Article provided by American Economic Association in its journal American Economic Journal: Applied Economics.

Volume (Year): 5 (2013)
Issue (Month): 1 (January)
Pages: 104-35

as
in new window

Handle: RePEc:aea:aejapp:v:5:y:2013:i:1:p:104-35
Note: DOI: 10.1257/app.5.1.104
Contact details of provider: Web page: https://www.aeaweb.org/aej-applied
Email:


More information through EDIRC

Order Information: Web: https://www.aeaweb.org/subscribe.html

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Harrison Hong & Jeffrey D. Kubik & Jeremy C. Stein, 2003. "Thy Neighbor's Portfolio: Word-of-Mouth Effects in the Holdings and Trades of Money Managers," Harvard Institute of Economic Research Working Papers 2006, Harvard - Institute of Economic Research.
  2. 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.
  3. Joao Cocco & John Campbell, 2004. "Household Risk Management and Optimal Mortgage Choice," Econometric Society 2004 North American Winter Meetings 646, Econometric Society.
  4. Stefano G. Athanasoulis & Robert J. Shiller, 1999. "World Income Components: Measuring and Exploiting Risk-Sharing Opportunities," Cowles Foundation Discussion Papers 1239, Cowles Foundation for Research in Economics, Yale University.
  5. Jaap H. Abbring & Pierre-Andre Chiappori, 2004. "Moral Hazard and Dynamic Insurance Data," 2004 Meeting Papers 316, Society for Economic Dynamics.
  6. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  7. 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.
  8. Stefano G. Athanasoulis & Robert J. Shiller, 1997. "The Significance of the Market Portfolio," Cowles Foundation Discussion Papers 1154, Cowles Foundation for Research in Economics, Yale University.
  9. Marianne Bertrand & Dean Karlin & Sendhil Mullainathan & Eldar Shafir & Jonathan Zinman, 2005. "What's Psychology Worth? A Field Experiment in the Consumer Credit Market," NBER Working Papers 11892, National Bureau of Economic Research, Inc.
  10. Stijn Van Nieuwerburgh & Laura Veldkamp, 2009. "Information Immobility and the Home Bias Puzzle," Journal of Finance, American Finance Association, vol. 64(3), pages 1187-1215, 06.
  11. Szeidl, Adam & Rosenblat, Tanya & Mobius, Markus & Karlan, Dean, 2009. "Trust and Social Collateral," Scholarly Articles 3051620, Harvard University Department of Economics.
  12. Daniel J. Clarke, 2016. "A Theory of Rational Demand for Index Insurance," American Economic Journal: Microeconomics, American Economic Association, vol. 8(1), pages 283-306, February.
  13. 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.
  14. Johnson, Eric J, et al, 1993. "Framing, Probability Distortions, and Insurance Decisions," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 35-51, August.
  15. Justin Wolfers & Eric Zitzewitz, 2004. "Prediction Markets," Discussion Papers 03-025, Stanford Institute for Economic Policy Research.
  16. Ricardo Reis, 2004. "Inattentive Consumers," NBER Working Papers 10883, National Bureau of Economic Research, Inc.
  17. Esther Duflo & Michael Kremer & Jonathan Robinson, 2011. "Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya," American Economic Review, American Economic Association, vol. 101(6), pages 2350-90, October.
  18. Sharon Maccini & Dean Yang, 2009. "Under the Weather: Health, Schooling, and Economic Consequences of Early-Life Rainfall," American Economic Review, American Economic Association, vol. 99(3), pages 1006-26, June.
  19. Dean S. Karlan & Jonathan Zinman, 2008. "Credit Elasticities in Less-Developed Economies: Implications for Microfinance," American Economic Review, American Economic Association, vol. 98(3), pages 1040-68, June.
  20. Harrison Hong & Jeffrey D. Kubik & Jeremy C. Stein, 2001. "Social Interaction and Stock-Market Participation," NBER Working Papers 8358, National Bureau of Economic Research, Inc.
  21. John Cawley & Tomas Philipson, 1996. "An Empirical Examination of Information Barriers to Trade in Insurance," NBER Working Papers 5669, National Bureau of Economic Research, Inc.
  22. Jean Pinquet & Jaap Abbring & Pierre-André Chiappori, 2003. "Moral Hazard and Dynamic Insurance Data," Post-Print hal-00397121, HAL.
  23. Gine, Xavier & Yang, Dean, 2007. "Insurance, credit, and technology adoption : field experimental evidence from Malawi," Policy Research Working Paper Series 4425, The World Bank.
  24. Cull, Robert & Demirguc-Kunt, Asli & Morduch, Jonathan, 2008. "Microfinance meets the market," Policy Research Working Paper Series 4630, The World Bank.
  25. Barseghyan, Levon & Molinari, Francesca & O'Donoghue, Ted & Teitelbaum, Joshua C., 2011. "The Nature of Risk Preferences: Evidence from Insurance Choices," Working Papers 11-03, Cornell University, Center for Analytic Economics.
  26. 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.
  27. Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2005. "Trusting the Stock Market," CEPR Discussion Papers 5288, C.E.P.R. Discussion Papers.
  28. Seema Jayachandran, 2006. "Selling Labor Low: Wage Responses to Productivity Shocks in Developing Countries," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 538-575, June.
  29. Rosenzweig, Mark R. & Binswanger, Hans P., 1992. "Wealth, weather risk, and the composition and profitability of agricultural investments," Policy Research Working Paper Series 1055, The World Bank.
  30. Annamaria Lusardi & Olivia S. Mitchell, 2006. "Financial Literacy and Planning: Implications for Retirement Wellbeing," DNB Working Papers 078, Netherlands Central Bank, Research Department.
  31. Xavier Giné & Robert Townsend & James Vickery, 2007. "Statistical Analysis of Rainfall Insurance Payouts in Southern India," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(5), pages 1248-1254.
  32. Clarke,Daniel Jonathan & Mahul,Olivier & Rao,Kolli Nageswara & Verma,Niraj, 2012. "Weather based crop insurance in India," Policy Research Working Paper Series 5985, The World Bank.
  33. Hans Binswanger, 1980. "Attitudes toward risk: Experimental measurement in rural india," Artefactual Field Experiments 00009, The Field Experiments Website.
  34. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 629-649.
  35. Esther Duflo & Christopher Udry, 2003. "Intrahousehold Resource Allocation in Côte D'ivoire: Social Norms, Separate Accounts and Consumption Choices," Working Papers 857, Economic Growth Center, Yale University.
  36. repec:reg:rpubli:259 is not listed on IDEAS
  37. Morduch, J., 1995. "Income Smoothing and Consumption Smoothing," Papers 512, Harvard - Institute for International Development.
  38. Andreas Fuster & Paul S. Willen, 2010. "Insuring Consumption Using Income-Linked Assets," NBER Working Papers 15829, National Bureau of Economic Research, Inc.
  39. Robert J. Shiller, 2008. "Derivatives Markets for Home Prices," NBER Working Papers 13962, National Bureau of Economic Research, Inc.
  40. Karlan, Dean & Kutsoati, Ed & McMillan, Margaret & Udry, Chris, 2010. "Crop price indemnified loans for farmers," IFPRI discussion papers 1021, International Food Policy Research Institute (IFPRI).
  41. 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.
  42. Stefan Dercon & Pramila Krishnan, 1997. "In sickness and in health... risk-sharing within households in rural Ethiopia," Economics Series Working Papers WPS/1997-12, University of Oxford, Department of Economics.
  43. 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.
  44. Hanming Fang & Michael P. Keane & Dan Silverman, 2006. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," NBER Working Papers 12289, National Bureau of Economic Research, Inc.
  45. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, December.
  46. Bertrand, Marianne & Karlan, Dean & Mullainathan, Sendhil & Shafir, Eldar & Zinman, Jonathan, 2009. "What's Advertising Content Worth? Evidence from a Consumer Credit Marketing Field Experiment," Working Papers 58, Yale University, Department of Economics.
  47. World Bank, 2005. "Managing Agricultural Production Risk : Innovations in Developing Countries," World Bank Other Operational Studies 14434, The World Bank.
  48. Dean Yang & HwaJung Choi, 2005. "Are Remittances Insurance? Evidence from Rainfall Shocks in the Philippines," Working Papers 535, Research Seminar in International Economics, University of Michigan.
  49. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
  50. Neil A. Doherty & Harris Schlesinger, 1990. "Rational Insurance Purchasing: Consideration of Contract Nonperformance," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 243-253.
  51. World Bank, 2005. "Managing Agricultural Production Risk : Innovations in Developing Countries," World Bank Other Operational Studies 8797, The World Bank.
  52. Mittal, Vikas & Ross, William T., 1998. "The Impact of Positive and Negative Affect and Issue Framing on Issue Interpretation and Risk Taking," Organizational Behavior and Human Decision Processes, Elsevier, vol. 76(3), pages 298-324, December.
  53. Hans P. Binswanger, 1980. "Attitudes Toward Risk: Experimental Measurement in Rural India," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 62(3), pages 395-407.
  54. Paxson, Christina H, 1992. "Using Weather Variability to Estimate the Response of Savings to Transitory Income in Thailand," American Economic Review, American Economic Association, vol. 82(1), pages 15-33, March.
  55. Adriano A. Rampini & S. Viswanathan, 2010. "Collateral, Risk Management, and the Distribution of Debt Capacity," Journal of Finance, American Finance Association, vol. 65(6), pages 2293-2322, December.
Full references (including those not matched with items on IDEAS)

This item is featured on the following reading lists or Wikipedia pages:

  1. Barriers to Household Risk Management: Evidence from India (AEJ:AE 2013) in ReplicationWiki

When requesting a correction, please mention this item's handle: RePEc:aea:aejapp:v:5:y:2013:i:1:p:104-35. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros)

or (Michael P. Albert)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.