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The Impact of Microinsurance on Consumption Smoothing and Asset Protection: Evidence from a Drought in Kenya

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

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.

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File URL: http://purl.umn.edu/151141
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Paper provided by Agricultural and Applied Economics Association in its series 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. with number 151141.

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Date of creation: 2013
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Handle: RePEc:ags:aaea13:151141
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  1. 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.
  2. Toth, Russell, 2010. "Traps and Thresholds in Pastoralist Mobility," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61336, Agricultural and Applied Economics Association.
  3. 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.
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  5. 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.
  6. Ahmed Mushfiq Mobarak & Mark Rosenzweig, 2012. "Selling Formal Insurance to the Informally Insured," Working Papers 1007, Economic Growth Center, Yale University.
  7. 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).
  8. 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.
  9. A. Mushfiq Mobarak & Mark Rosenzweig, 2012. "Selling Formal Insurance to the Informally Insured," Working Papers id:4777, eSocialSciences.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. Santos, Paulo & Barrett, Christopher B., 2011. "Persistent poverty and informal credit," Journal of Development Economics, Elsevier, vol. 96(2), pages 337-347, November.
  17. 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.
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