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Climate change and index insurance demand: Evidence from a framed field experiment in Tanzania

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  • Dougherty, John P.
  • Flatnes, Jon Einar
  • Gallenstein, Richard A.
  • Miranda, Mario J.
  • Sam, Abdoul G.

Abstract

Index insurance has been touted as part of an adaptation strategy to mitigate climate risks among smallholder farmers. However, in the face of increasing drought probabilities, demand for index insurance may decrease compared to a scenario with no climate change, if farmers learn slowly or place considerable weight on prior beliefs. Using data from a framed field experiment in Tanzania, we estimate a structural learning model based on a Bayesian change-point inference method and separately identify the effect of learning, expectations, recency bias, and ambiguity on insurance demand. Furthermore, by simulating the supply-side of the insurance market under a set of plausible assumptions, we show that climate change results in reduced uptake rates in most cases, although demand may increase if the severity of climate change is sufficiently low. Overall, our results provide an alternative explanation for the puzzle of low index insurance demand.

Suggested Citation

  • Dougherty, John P. & Flatnes, Jon Einar & Gallenstein, Richard A. & Miranda, Mario J. & Sam, Abdoul G., 2020. "Climate change and index insurance demand: Evidence from a framed field experiment in Tanzania," Journal of Economic Behavior & Organization, Elsevier, vol. 175(C), pages 155-184.
    • Handle: RePEc:eee:jeborg:v:175:y:2020:i:c:p:155-184
    DOI: 10.1016/j.jebo.2020.04.016
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    More about this item

    Keywords

    Index insurance; Climate change; Learning; Ambiguity aversion; Recency bias; Framed field experiment;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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