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Barriers to Household Risk Management; Evidence from India

  • Robert M. Townsend
  • Shawn Cole
  • Jeremy Tobacman
  • Xavier Gine
  • James Ian Vickery
  • Petia Topalova

Why do many households remain exposed to large exogenous sources of non-systematic income risk? We use a series of randomized field experiments in rural India to test the importance of price and non-price factors in the adoption of an innovative rainfall insurance product. Demand is significantly price sensitive, but widespread take-up would not be achieved even if the product offered a payout ratio comparable to U.S. insurance contracts. We present evidence suggesting that lack of trust, liquidity constraints and limited salience are significant non-price frictions that constrain demand. We suggest contract design improvements to mitigate these frictions.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/195.

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Length: 43
Date of creation: 01 Jul 2012
Handle: RePEc:imf:imfwpa:12/195
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