Demand for Health Insurance: Financial and Informational Role of Informal Networks

We study why free public health insurance in India exhibits persistently low utilisation despite high out of pocket health expenses. In the context of the Arogyasri program in Andhra Pradesh, we distinguish the roles of informal financial and information networks in shaping adoption. Empirically, households embedded in financial networks show higher take-up and utilisation, while information networks have no effect. To explain this pattern, we develop a simple theoretical framework in which informal financial networks act as mutual insurance: because members bear each other’s uninsured losses, the network has an incentive to push all members to enrol when the expected cost of shocks exceeds enrolment transaction costs. This generates corner solutions for network members and interior solutions for non-members, consistent with observed bimodal take-up patterns. The model clarifies why financial—but not informational—ties complement public insurance and highlights community-based mechanisms for increasing adoption.