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Loss aversion and the demand for index insurance

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  • Lampe, Immanuel
  • Würtenberger, Daniel

Abstract

This work analyzes if reference dependence and loss aversion can explain the puzzling low adoption rates of rainfall index insurance. We present a model that predicts the impact of loss aversion on index insurance demand to vary with different levels of insurance understanding. Index insurance demand of farmers who are unaware of the loss-hedging benefit that insurance provides decreases with loss aversion. In contrast, insurance demand of farmers who are aware of the loss-hedging benefit increases with loss aversion. The model further predicts that farmers who are unaware of the loss-hedging benefit will not demand an even highly subsidized index insurance. Using data from a randomized controlled trial involving a sample of Indian farmers we provide empirical support for our core conjecture that insurance understanding mitigates the negative impact of loss aversion on index insurance adoption.

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  • Lampe, Immanuel & Würtenberger, Daniel, 2020. "Loss aversion and the demand for index insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 678-693.
    • Handle: RePEc:eee:jeborg:v:180:y:2020:i:c:p:678-693
    DOI: 10.1016/j.jebo.2019.10.019
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    2. Shin, Soye & Magnan, Nicholas & Mullally, Conner & Janzen, Sarah, 2022. "Demand for Weather Index Insurance among Smallholder Farmers under Prospect Theory," Journal of Economic Behavior & Organization, Elsevier, vol. 202(C), pages 82-104.
    3. Xuche Gong & David A. Hennessy & Hongli Feng, 2023. "Systemic risk, relative subsidy rates, and area yield insurance choice," American Journal of Agricultural Economics, John Wiley & Sons, vol. 105(3), pages 888-913, May.
    4. Hwang, In Do, 2021. "Prospect theory and insurance demand: Empirical evidence on the role of loss aversion," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 95(C).
    5. Rajeev, Meenakshi & Nagendran, Pranav, 2023. "Protecting land and livelihood under climate risks: What hinders crop insurance adoption?," Land Use Policy, Elsevier, vol. 131(C).
    6. Nordmeyer, Eike Florenz, 2023. "German farmers' perceived usefulness of satellite-based index insurance - Insights from a transtheoretical model," 97th Annual Conference, March 27-29, 2023, Warwick University, Coventry, UK 334557, Agricultural Economics Society - AES.

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    More about this item

    Keywords

    Prospect theory; Reference dependence; Microinsurance; Farm household;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

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