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Liquidity constraints, informal institutions, and the adoption of weather insurance: A randomized controlled Trial in Ethiopia

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  • Belissa, Temesgen
  • Bulte, Erwin
  • Cecchi, Francesco
  • Gangopadhyay, Shubhashis
  • Lensink, Robert

Abstract

We report the results of a drought insurance experiment in Ethiopia, and examine whether uptake of index-based insurance is enhanced if we allow farmers to pay after harvest (addressing a liquidity constraint). We also test to what extent uptake can be enhanced by promoting insurance via informal risk-sharing institutions (Iddirs), to reduce trust and information problems. The delayed payment insurance product increases uptake substantially when compared to standard insurance, from 8% to 24%, and leveraging informal institutions results in even greater uptake (43%). We also find suggestive evidence that the delayed premium product is indeed better at targeting the liquidity constrained. However, default rates associated with delayed payments are relatively high and concentrated in a small number of Iddirs – potentially compromising the economic viability of the novel product. We discuss how default rates can be reduced.

Suggested Citation

  • Belissa, Temesgen & Bulte, Erwin & Cecchi, Francesco & Gangopadhyay, Shubhashis & Lensink, Robert, 2019. "Liquidity constraints, informal institutions, and the adoption of weather insurance: A randomized controlled Trial in Ethiopia," Journal of Development Economics, Elsevier, vol. 140(C), pages 269-278.
  • Handle: RePEc:eee:deveco:v:140:y:2019:i:c:p:269-278
    DOI: 10.1016/j.jdeveco.2019.06.006
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    Cited by:

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    2. Takahashi, Kazushi & Noritomo, Yuma & Ikegami, Munenobu & Jensen, Nathaniel D., 2020. "Understanding pastoralists’ dynamic insurance uptake decisions: Evidence from four-year panel data in Ethiopia," Food Policy, Elsevier, vol. 95(C).
    3. Witsanu Attavanich & Sommarat Chantarat & Jirath Chenphuengpawn & Phumsith Mahasuweerachai & Kannika Thampanishvong, 2019. "Farms, Farmers and Farming: A Perspective through Data and Behavioral Insights," PIER Discussion Papers 122, Puey Ungphakorn Institute for Economic Research.
    4. Sarah Janzen & Nicholas Magnan & Conner Mullally & Soye Shin & I. Bailey Palmer & Judith Oduol & Karl Hughes, 2021. "Can Experiential Games and Improved Risk Coverage Raise Demand for Index Insurance? Evidence from Kenya," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(1), pages 338-361, January.
    5. Khushbu Mishra & Richard A. Gallenstein & Mario J. Miranda & Abdoul G. Sam & Patricia Toledo & Francis Mulangu, 2021. "Insured Loans and Credit Access: Evidence from a Randomized Field Experiment in Northern Ghana," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(3), pages 923-943, May.
    6. Yanyan Liu & Kevin Chen & Ruth V. Hill, 2020. "Delayed Premium Payment, Insurance Adoption, and Household Investment in Rural China," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(4), pages 1177-1197, August.
    7. Hample, Kelsey C, 2021. "Formal insurance for the informally insured: Experimental evidence from Kenya," World Development Perspectives, Elsevier, vol. 22(C).
    8. Erwin Bulte & Robert Lensink, 2021. "Empowerment and intimate partner violence: Domestic abuse when household income is uncertain," Review of Development Economics, Wiley Blackwell, vol. 25(1), pages 148-162, February.
    9. Patil, Vikram & Veettil, Prakashan Chellattan & Yashodha, Yashodha, 2021. "Understanding Farmers’ Low Uptake of Crop Insurance in India: A Discrete Choice Experiment Approach," 2021 Conference, August 17-31, 2021, Virtual 315232, International Association of Agricultural Economists.

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