The Impact of Microinsurance on Consumption Smoothing and Asset Protection: Evidence from a Drought in Kenya
When natural disasters strike in developing countries, households are often forced to choose between preserving assets or consumption: either can result in permanent consequences. In this paper we ask: can insurance transfer risk in a way that reduces the need for households to rely on costly coping strategies that undermine their future productivity? Since 2010, pastoralists in northern Kenya have had access to a novel index-based drought insurance product. We analyze the impact of a drought-induced insurance payout on consumption smoothing and asset protection in this setting. Our results show that insured households are on average 36 percentage points less likely to anticipate drawing down assets, and 25 percentage points less likely to anticipate reducing meals upon receipt of a payout. Empirical evidence of a poverty trap in this setting suggests that these average impacts may mask a heterogeneous behavioral response and subsequent heterogeneous impacts of insurance. For this reason we use Hansen's (2000) threshold estimator to estimate a critical asset threshold around which optimal coping strategies bifurcate. Using this approach we find that that households holding assets above a critical asset threshold, who are also most likely to sell assets, are 64 percentage points less likely to anticipate doing so when an insurance payout is available. Households holding assets below the estimated threshold, who are likely to destabilize consumption, are 43 percentage points less likely to anticipate doing so with insurance. Together, these results suggest that insurance can help households to protect assets during crises, without having the deleterious effect on human capital investments.
|Date of creation:||2013|
|Date of revision:|
|Contact details of provider:|| Postal: 555 East Wells Street, Suite 1100, Milwaukee, Wisconsin 53202|
Phone: (414) 918-3190
Fax: (414) 276-3349
Web page: http://www.aaea.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John McPeak & Sommarat Chantarat & Andrew Mude, 2010. "Explaining index-based livestock insurance to pastoralists," Agricultural Finance Review, Emerald Group Publishing, vol. 70(3), pages 333-352, November.
- Hill, Ruth Vargas & Viceisza, Angelino, 2010. "An experiment on the impact of weather shocks and insurance on risky investment," IFPRI discussion papers 974, International Food Policy Research Institute (IFPRI).
- Carter, Michael R. & Lybbert, Travis J., 2012. "Consumption versus asset smoothing: testing the implications of poverty trap theory in Burkina Faso," Journal of Development Economics, Elsevier, vol. 99(2), pages 255-264.
- A. Mushfiq Mobarak & Mark Rosenzweig, 2012.
"Selling Formal Insurance to the Informally Insured,"
- Ahmed Mushfiq Mobarak & Mark Rosenzweig, 2012. "Selling Formal Insurance to the Informally Insured," Working Papers 1007, Economic Growth Center, Yale University.
- Mobarak, A. Mushfiq & Rosenzweig, Mark, 2012. "Selling Formal Insurance to the Informally Insured," Working Papers 97, Yale University, Department of Economics.
- 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.
- Toth, Russell, 2010.
"Traps and Thresholds in Pastoralist Mobility,"
2010 Annual Meeting, July 25-27, 2010, Denver, Colorado
61336, Agricultural and Applied Economics Association.
- Dean Karlan & Christopher Udry & Isaac Osei-Akoto & Robert Darko Osei, 2012.
"Agricultural Decisions after Relaxing Credit and Risk Constraints,"
1019, Economic Growth Center, Yale University.
- Dean Karlan & Robert Osei & Isaac Osei-Akoto & Christopher Udry, 2014. "Agricultural Decisions after Relaxing Credit and Risk Constraints," The Quarterly Journal of Economics, Oxford University Press, vol. 129(2), pages 597-652.
- Karlan, Dean & Osei-Akoto, Isaac & Osei, Robert Darko & Udry, Christopher, 2012. "Agricultural Decisions after Relaxing Credit and Risk Constraints," Working Papers 110, Yale University, Department of Economics.
- Dean Karlan & Robert Darko Osei & Isaac Osei-Akoto & Christopher Udry, 2012. "Agricultural Decisions after Relaxing Credit and Risk Constraints," NBER Working Papers 18463, National Bureau of Economic Research, Inc.
- Karlan, Dean S. & Osei, Robert & Osei-Akoto, Isaac & Udry, Christopher, 2012. "Agricultural Decisions after Relaxing Credit and Risk Constraints," CEPR Discussion Papers 9173, C.E.P.R. Discussion Papers.
- Dean Karlan, Robert Osei, Isaac Osei-Akoto, and Christopher Udry, 2012. "Agricultural Decisions after Relaxing Credit and Risk Constraints," Working Papers 310, Center for Global Development.
- Christopher Barrett & Paswel Phiri Marenya & John Mcpeak & Bart Minten & Festus Murithi & Willis Oluoch-Kosura & Frank Place & Jean Claude Randrianarisoa & Jhon Rasambainarivo & Justine Wangila, 2006. "Welfare dynamics in rural Kenya and Madagascar," Journal of Development Studies, Taylor & Francis Journals, vol. 42(2), pages 248-277.
- Dasgupta, Partha & Ray, Debraj, 1986. "Inequality as a Determinant of Malnutrition and Unemployment: Theory," Economic Journal, Royal Economic Society, vol. 96(384), pages 1011-34, December.
- Lybbert, Travis J. & Barrett, Christopher B. & Desta, Solomon & Coppock, D. Layne, 2002.
"Stochastic Wealth Dynamics And Risk Management Among A Poor Population,"
14736, Cornell University, Department of Applied Economics and Management.
- Travis J. Lybbert & Christopher B. Barrett & Solomon Desta & D. Layne Coppock, 2004. "Stochastic wealth dynamics and risk management among a poor population," Economic Journal, Royal Economic Society, vol. 114(498), pages 750-777, October.
- Bruce E. Hansen, 2000.
"Sample Splitting and Threshold Estimation,"
Econometric Society, vol. 68(3), pages 575-604, May.
- Barnett, Barry J. & Barrett, Christopher B. & Skees, Jerry R., 2008. "Poverty Traps and Index-Based Risk Transfer Products," World Development, Elsevier, vol. 36(10), pages 1766-1785, October.
- Carter, Michael R. & Little, Peter D. & Mogues, Tewodaj & Negatu, Workneh, 2007. "Poverty Traps and Natural Disasters in Ethiopia and Honduras," World Development, Elsevier, vol. 35(5), pages 835-856, May.
- 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.
- Michael Carter & Christopher Barrett, 2006. "The economics of poverty traps and persistent poverty: An asset-based approach," Journal of Development Studies, Taylor & Francis Journals, vol. 42(2), pages 178-199.
- Santos, Paulo & Barrett, Christopher B., 2011. "Persistent poverty and informal credit," Journal of Development Economics, Elsevier, vol. 96(2), pages 337-347, November.
When requesting a correction, please mention this item's handle: RePEc:ags:aaea13:151141. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.