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Risk Preferences and Demand for Insurance in Peru: A Field Experiment

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  • Galarza, Francisco B.
  • Carter, Michael R.

Abstract

This paper reports the results of behavioral economic experiments conducted in Peru to examine the relationship amongst risk preferences, loan take-up, and insurance purchase decisions. This area-based yield insurance can help reduce people's vulnerability to large scale covariate shocks, and can also lower the loan default probability under extreme negative covariate shocks. In a context of collateralized formal credit markets, we provide suggestive evidence that insurance may help reduce the fear of losing collateral that prevents potential borrowers from taking loans. Framing these experiments to recreate a real life situation, we started with a Baseline Game where subjects had to choose between a fallback production project and an uninsured loan. We then introduced a third project choice--loan with yield insurance (Insurance Game)--which allows us to measure the effect of introducing insurance on the demand for loans. Overall, more than 50 percent of the subjects are willing to buy insurance in this insurance game. Further, controling for the number of peers in the ag network, wealth, and choices made in the baseline game, we find that the project choice decision is predicted by a judgment bias known as hot-hand effect, and risk aversion. In the latter case, the shape of the relationship is quadratic, meaning that highly risk averse subjects will prefer switching to the risky, uninsured loan project, while those showing a low and moderate risk aversion will stick to the safer (fallback or insured loan) projects.

Suggested Citation

  • Galarza, Francisco B. & Carter, Michael R., 2010. "Risk Preferences and Demand for Insurance in Peru: A Field Experiment," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61871, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea10:61871
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    References listed on IDEAS

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    1. Shawn Cole & Xavier Gine & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2013. "Barriers to Household Risk Management: Evidence from India," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 104-135, January.
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    Citations

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    Cited by:

    1. Coble, Keith H. & Barnett, Barry J. & Riley, John Michael, 2013. "Challenging Belief in the Law of Small Numbers," 2013 AAEA: Crop Insurance and the Farm Bill Symposium, October 8-9, Louisville, KY 156958, Agricultural and Applied Economics Association.
    2. Martin Eling & Shailee Pradhan & Joan T Schmit, 2014. "The Determinants of Microinsurance Demand," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(2), pages 224-263, April.
    3. Awel Y. & Azomahou T.T., 2015. "Risk preference or financial literacy? Behavioural experiment on index insurance demand," MERIT Working Papers 005, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    4. Elabed, Ghada & Carter, Michael R., 2015. "Compound-risk aversion, ambiguity and the willingness to pay for microinsurance," Journal of Economic Behavior & Organization, Elsevier, vol. 118(C), pages 150-166.
    5. repec:pai:apunup:es-66-01 is not listed on IDEAS
    6. repec:eee:wdevel:v:104:y:2018:i:c:p:183-196 is not listed on IDEAS
    7. Fiala, Oliver & Wende, Danny, 2016. "The impact of trust, risk and disaster exposure on microinsurance demand: Results of a DCE analysis in Cambodia," Dresden Discussion Paper Series in Economics 01/16, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    8. Francisco Galarza, 2010. "Experimentos de campo en economía: preferencias en relación al riesgo y demanda por contratos intertemporales en el Perú," Apuntes. Revista de ciencias sociales, Fondo Editorial, Universidad del Pacífico, vol. 37(66), pages 5-27.
    9. Platteau, Jean-Philippe & De Bock, Ombeline & Gelade, Wouter, 2017. "The Demand for Microinsurance: A Literature Review," World Development, Elsevier, vol. 94(C), pages 139-156.
    10. Catia Batista & Janis Umblijs, 2016. "Do migrants send remittances as a way of self-insurance?," Oxford Economic Papers, Oxford University Press, vol. 68(1), pages 108-130.
    11. Cárcamo, Jorge & Cramon-Taubadel, Stephan von, 2016. "Assessing small-scale raspberry producers' risk and ambiguity preferences: Evidence from field-experiment data in rural Chile," DARE Discussion Papers 1610, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).
    12. Elabed, Ghada & Carter, Michael R., 2013. "Basis Risk and Compound-Risk Aversion: Evidence from a WTP Experiment in Mali," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150353, Agricultural and Applied Economics Association.
    13. Ginger Turner & Farah Said & Uzma Afzal, 2014. "Microinsurance Demand After a Rare Flood Event: Evidence From a Field Experiment in Pakistan," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(2), pages 201-223, April.
    14. Ayako Matsuda & Takashi Kurosaki, 2017. "Temperature and Rainfall Index Insurance in India," OSIPP Discussion Paper 17E002, Osaka School of International Public Policy, Osaka University.

    More about this item

    Keywords

    Risk and Uncertainty;

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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