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Selling Formal Insurance to the Informally Insured

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  • A. Mushfiq Mobarak
  • Mark Rosenzweig

Abstract

Unpredictable rainfall is an important risk for agricultural activity, and farmers in developing countries often receive incomplete insurance from informal risk-sharing networks. The demand for, and effects of, offering formal index-based rainfall insurance is studied through a randomized experiment in an environment where the informal risk sharing network can be readily identified and richly characterized: sub-castes in rural India. A model allowing for both idiosyncratic and aggregate risk shows that informal networks lower the demand for formal insurance only if the network indemnifies against aggregate risk, but not if its primary role is to insure against farmer-specific losses. When formal insurance carries basis risk (mismatches between payouts and actual losses due to the remote location of the rainfall gauge), informal risk sharing that covers idiosyncratic losses enhance the benefits of index insurance. Formal index insurance enables households to take more risk even in the presence of informal insurance. [BREAD Working Paper No. 322]. URL:[http://ipl.econ.duke.edu/bread/papers/working/322.pdf].

Suggested Citation

  • A. Mushfiq Mobarak & Mark Rosenzweig, 2012. "Selling Formal Insurance to the Informally Insured," Working Papers id:4777, eSocialSciences.
  • Handle: RePEc:ess:wpaper:id:4777
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    More about this item

    Keywords

    Formal Insurance; Informally; rural India; farmer-specific losses; rainfall gauges; households; agriculture; livelihoods; sources; weather-related; production risks; Indian workforce; poor; rural population; credit; insurance markets; risk; researchers; agricultural technology; increase productivity; caste-level linear variables; village; caste; Idiosyncratic;
    All these keywords.

    JEL classification:

    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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