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Paying in pieces: A natural experiment on demand for life insurance under different payment schemes

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  • Bauchet, Jonathan
  • Morduch, Jonathan

Abstract

Risk is pervasive in low-income economies, but insurance markets tend to be under-developed and demand for existing products is often low and poorly understood. Usually, customers must buy insurance by making a single lump-sum payment. We study a popular life insurance product sold by Mexico's leading microfinance institution. We exploit a large-scale natural experiment involving 200,000 poor female microcredit customers and show that demand increased by 59–74 percent when customers were allowed to pay in weekly installments instead of in a lump sum, even though doing so was more costly for them. The finding is not explained by price or income, which do not change. We describe the possible roles of liquidity constraints and other explanations, and relate the result to discussions of demand for microinsurance and other products, including merit goods, in similar contexts.

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  • Bauchet, Jonathan & Morduch, Jonathan, 2019. "Paying in pieces: A natural experiment on demand for life insurance under different payment schemes," Journal of Development Economics, Elsevier, vol. 139(C), pages 69-77.
    • Handle: RePEc:eee:deveco:v:139:y:2019:i:c:p:69-77
    DOI: 10.1016/j.jdeveco.2019.02.002
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    More about this item

    Keywords

    Discount rates; Present bias; Liquidity constraints; Saving constraints; Mexico; Merit goods;
    All these keywords.

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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