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Valuing Asset Insurance in the Presence of Poverty Traps: A Dynamic Approach

  • Janzen, Sarah A.
  • Carter, Michael R.
  • Ikegami, Munenobu

Ample evidence exists to suggest that nonlinear asset dynamics can give rise to an environment of poverty traps. When dynamic asset thresholds matter, risk not only affects households ex post, but it also influences ex ante behavior. In this environment some house-holds may have much to gain from a productive safety net which prevents asset levels from dipping below the Micawber threshold. Insurance is a market-based mechanism that can act as a safety net, improving the risk management strategies available to vulnerable households. In this paper we use dynamic programming methods to assess whether vulnerable households will `self-select' into an asset insurance scheme. We show that while such households opti- mally insure at low levels, insurance serves to crowd in additional investment, causing a shift in the Micawber threshold. This investment comes from the hope of reduced vulnerability that insurance offers in the future. Finally, we use our model to make predictions about the value of index-based livestock insurance (IBLI) in Marsabit district of northern Kenya. Our results suggest that the behavioral changes brought about by insurance may result in decreased poverty levels over time.

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Paper provided by Agricultural and Applied Economics Association in its series 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington with number 124805.

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Date of creation: 2012
Date of revision:
Handle: RePEc:ags:aaea12:124805
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  1. John Hoddinott, 2006. "Shocks and their consequences across and within households in Rural Zimbabwe," Journal of Development Studies, Taylor & Francis Journals, vol. 42(2), pages 301-321.
  2. Hongbin Cai & Yuyu Chen & Hanming Fang & Li-An Zhou, 2009. "Microinsurance, Trust and Economic Development: Evidence from a Randomized Natural Field Experiment," PIER Working Paper Archive 09-034, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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  13. Harold Alderman & Trina Haque, 2007. "Insurance Against Covariate Shocks : The Role of Index-Based Insurance in Social Protection in Low-Income Countries of Africa," World Bank Publications, The World Bank, number 6736, March.
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  15. Santos, Paulo & Barrett, Christopher B., 2011. "Persistent poverty and informal credit," Journal of Development Economics, Elsevier, vol. 96(2), pages 337-347, November.
  16. Sommarat Chantarat & Christopher B. Barrett & Andrew G. Mude & Calum G. Turvey, 2007. "Using Weather Index Insurance to Improve Drought Response for Famine Prevention," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(5), pages 1262-1268.
  17. Travis J. Lybbert & Christopher B. Barrett, 2011. "RiskÔÇÉTaking Behavior In The Presence Of Nonconvex Asset Dynamics," Economic Inquiry, Western Economic Association International, vol. 49(4), pages 982-988, October.
  18. Toth, Russell, 2010. "Traps and Thresholds in Pastoralist Mobility," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61336, Agricultural and Applied Economics Association.
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