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

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

Abstract

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.

Suggested Citation

  • Janzen, Sarah A. & Carter, Michael R. & Ikegami, Munenobu, 2012. "Valuing Asset Insurance in the Presence of Poverty Traps: A Dynamic Approach," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124805, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea12:124805
    DOI: 10.22004/ag.econ.124805
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    References listed on IDEAS

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    Cited by:

    1. Farrin, Kathleen M. & Miranda, Mario J., 2013. "Premium Benefits? A Heterogeneous Agent Model of Credit-Linked Index Insurance and Farm Technology Adoption," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149666, Agricultural and Applied Economics Association.
    2. William M. Fonta & Safietou Sanfo & Abbi M. Kedir & Djiby R. Thiam, 2018. "Estimating farmers’ willingness to pay for weather index-based crop insurance uptake in West Africa: Insight from a pilot initiative in Southwestern Burkina Faso," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 6(1), pages 1-20, December.
    3. Arora, Gaurav & Agarwal, Sandip K., 2020. "Agricultural input use and index insurance adoption: Concept and evidence," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304508, Agricultural and Applied Economics Association.
    4. Janzen, Sarah A. & Carter, Michael R., 2013. "The Impact of Microinsurance on Consumption Smoothing and Asset Protection: Evidence from a Drought in Kenya," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 151141, Agricultural and Applied Economics Association.
    5. Christopher B. Barrett & Michael R. Carter, 2013. "The Economics of Poverty Traps and Persistent Poverty: Empirical and Policy Implications," Journal of Development Studies, Taylor & Francis Journals, vol. 49(7), pages 976-990, July.
    6. Carter, Michael R. & Janzen, Sarah A., 2018. "Social protection in the face of climate change: targeting principles and financing mechanisms," Environment and Development Economics, Cambridge University Press, vol. 23(3), pages 369-389, June.
    7. Jensen, Nathaniel D. & Mude, Andrew G. & Barrett, Christopher B., 2018. "How basis risk and spatiotemporal adverse selection influence demand for index insurance: Evidence from northern Kenya," Food Policy, Elsevier, vol. 74(C), pages 172-198.
    8. Christensen, Cheryl, 2018. "Progress and Challenges in Global Food Security," Amber Waves:The Economics of Food, Farming, Natural Resources, and Rural America, United States Department of Agriculture, Economic Research Service, vol. 0(01), February.
    9. Nathaniel Jensen & Christopher Barrett, 2017. "Agricultural Index Insurance for Development," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 39(2), pages 199-219.
    10. Farrin, Katie & Miranda, Mario J., 2015. "A heterogeneous agent model of credit-linked index insurance and farm technology adoption," Journal of Development Economics, Elsevier, vol. 116(C), pages 199-211.
    11. Takahashi, Kazushi & Ikegami, Munenobu & Sheahan, Megan & Barrett, Christopher B., 2014. "Quasi-experimental evidence on the drivers of index-based livestock insurance demand in Southern Ethiopia," IDE Discussion Papers 480, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    12. Takahashi, Kazushi & Ikegami, Munenobu & Sheahan, Megan & Barrett, Christopher B., 2016. "Experimental Evidence on the Drivers of Index-Based Livestock Insurance Demand in Southern Ethiopia," World Development, Elsevier, vol. 78(C), pages 324-340.

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    Keywords

    Food Security and Poverty; Livestock Production/Industries; Risk and Uncertainty;
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