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The demand for insurance against common shocks

Author

Listed:
  • Vianney Dequiedt

    (CERDI - Centre d'Études et de Recherches sur le Développement International - IRD - Institut de Recherche pour le Développement - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne)

  • Alain De Janvry

    (ARE - Agricultural & Resource Economics)

  • Elisabeth Sadoulet

    (ARE - Agricultural & Resource Economics)

Abstract

In recent years, index-based insurance has been offered to smallholder farmers in the developingworld to protect against common shocks such as weather shocks. Despite their attractive properties, these products have met with low demand. We consider the frequent situation where farmers are members of groups with common interests. We show that this creates strategic interactions among group members in deciding to insure that reduce the demand for insurance for two reasons. One is free riding due to positive externalities on other group members when a member chooses to insure. The other is potential coordination failure because it may not be profitable for a risk-averse member to insure if the other members do not. As a consequence, we argue that the demand for insurance against common shocks could increase if the insurance policywere sold to groups rather than to individuals.

Suggested Citation

  • Vianney Dequiedt & Alain De Janvry & Elisabeth Sadoulet, 2014. "The demand for insurance against common shocks," Post-Print halshs-00879617, HAL.
    • Handle: RePEc:hal:journl:halshs-00879617
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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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