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Insurance versus Savings for the Poor: Why One Should Offer Either Both or None

Author

Listed:
  • Landmann, Andreas

    (University of Erlangen-Nuremberg)

  • Vollan, Björn

    (University of Marburg)

  • Frölich, Markus

    (University of Mannheim)

Abstract

This paper analyzes data from a novel field experiment designed to test the impact of two different insurance products and a secret saving device on solidarity in risk-sharing groups among rural villagers in the Philippines. Risk is simulated by a lottery. Risk-sharing is possible in solidarity groups of three and insurance is introduced via less risky lotteries. Our main hypothesis is that formal market-based products lead to lower voluntary transfers among network members. We also test for the persistence of this crowding-out of solidarity. We find evidence for a reduction of solidarity by insurance if shocks are observable. Depending on insurance design, there is also evidence for persistence of this effect even if insurance is removed. Simulations using our regression results show that the benefits of insurance are completely offset by the reduction in transfers. However, if secret saving is possible solidarity is very low in general and there is no crowding out effect of insurance. This suggests that introducing formal insurance is not as effective as it is hoped for when the monetary situation can be closely monitored, but that it might be a very important complement when savings inhibit observing financial resources. The implication for policy is that microsavings should be offered simultaneously with microinsurance.

Suggested Citation

  • Landmann, Andreas & Vollan, Björn & Frölich, Markus, 2012. "Insurance versus Savings for the Poor: Why One Should Offer Either Both or None," IZA Discussion Papers 6298, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp6298
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    Cited by:

    1. Meike Will & Jürgen Groeneveld & Karin Frank & Birgit Müller, 2021. "Informal risk-sharing between smallholders may be threatened by formal insurance: Lessons from a stylized agent-based model," PLOS ONE, Public Library of Science, vol. 16(3), pages 1-18, March.
    2. Renate Strobl & Conny Wunsch, 2017. "Does Voluntary Risk Taking Affect Solidarity? Experimental Evidence from Kenya," CESifo Working Paper Series 6578, CESifo.
    3. Nikolov, Plamen & Bonci, Matthew, 2020. "Do public program benefits crowd out private transfers in developing countries? A critical review of recent evidence," World Development, Elsevier, vol. 134(C).
    4. Renate Strobl & Conny Wunsch, 2021. "Risky choices and solidarity: disentangling different behavioural channels," Experimental Economics, Springer;Economic Science Association, vol. 24(4), pages 1185-1214, December.
    5. Grimm, Michael & Hartwig, Renate & Reitmann, Ann-Kristin & Bocoum, Fadima Yaya, 2021. "Inter-household transfers: An empirical investigation of the income-transfer relationship with novel data from Burkina Faso," World Development, Elsevier, vol. 144(C).
    6. repec:zbw:rwirep:0432 is not listed on IDEAS
    7. Kunal Rajesh Lahoti & Shivani Hanji & Pratik Kamble & Kavita Vemuri, 2023. "Impact of Loss-Framing and Risk Attitudes on Insurance Purchase: Insights from a Game-like Interface Study," Papers 2310.13300, arXiv.org.
    8. Strobl, Renate & Wunsch, Conny, 2018. "Risky Choices and Solidarity: Why Experimental Design Matters," Working papers 2018/17, Faculty of Business and Economics - University of Basel.
    9. Christian Biener & Martin Eling, 2013. "Recent Research Developments Affecting Nonlife Insurance—The CAS Risk Premium Project 2012 Update," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 16(2), pages 219-231, September.
    10. Florian Klohn & Christoph Strupat, 2013. "Crowding out of Solidarity? – Public Health Insurance versus Informal Transfer Networks in Ghana," Ruhr Economic Papers 0432, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    11. Johannes G. Jaspersen, 2016. "Hypothetical Surveys And Experimental Studies Of Insurance Demand: A Review," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(1), pages 217-255, January.
    12. Martin Eling & Shailee Pradhan & Joan T Schmit, 2014. "The Determinants of Microinsurance Demand," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(2), pages 224-263, April.
    13. Czura, Kristina & Dequiedt, Vianney, 2015. "Willingness-to-pay for microinsurance and flexibility: Evidence from an agricultural investment lab-in-the-field experiment in Senegal," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112993, Verein für Socialpolitik / German Economic Association.
    14. Klohn, Florian & Strupat, Christoph, 2013. "Crowding out of Solidarity? – Public Health Insurance versus Informal Transfer Networks in Ghana," Ruhr Economic Papers 432, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    15. Nigus, Halefom & Nillesen, Eleonora & Mohnen, Pierre, 2018. "The effect of weather index insurance on social capital: Experimental evidence from Ethiopia," MERIT Working Papers 2018-007, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    16. Strupat, Christoph & Klohn, Florian, 2018. "Crowding out of solidarity? Public health insurance versus informal transfer networks in Ghana," World Development, Elsevier, vol. 104(C), pages 212-221.
    17. Uri Gneezy & Alex Imas, 2016. "Lab in the Field: Measuring Preferences in the Wild," CESifo Working Paper Series 5953, CESifo.
    18. Hanna Freudenreich & Marcela Ibanez & Stephan Dietrich & Oliver Musshoff, 2018. "Formal insurance, risk sharing, and the dynamics of other-regarding preferences," Department of Agricultural and Rural Development (DARE) Discussion Papers 266532, Georg-August-Universitaet Goettingen, Department of Agricultural Economics and Rural Development (DARE).
    19. Lenel, Friederike & Steiner, Susan, 2020. "Formal insurance and solidarity. Experimental evidence from Cambodia," Journal of Economic Behavior & Organization, Elsevier, vol. 174(C), pages 212-234.
    20. Grimm, Michael & Hartwig, Renate & Reitmann, Ann-Kristin & Bocoum, Fadima Yaya, 2020. "Can informal redistribution withstand formal safety nets? Insights from urban-rural transfers in Burkina Faso," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-81-20, University of Passau, Faculty of Business and Economics.
    21. Strobl, Renate, 2022. "Background risk, insurance and investment behaviour: Experimental evidence from Kenya," Journal of Economic Behavior & Organization, Elsevier, vol. 202(C), pages 34-68.
    22. Landmann, Andreas & Frölich, Markus, 2015. "Can health-insurance help prevent child labor? An impact evaluation from Pakistan," Journal of Health Economics, Elsevier, vol. 39(C), pages 51-59.
    23. Lenel, Friederike & Steiner, Susan, 2017. "Insurance and Solidarity: Evidence from a Lab-in-the-Field Experiment in Cambodia," IZA Discussion Papers 10986, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    insurance; savings; informal risk sharing; crowding out; field lab experiment; Philippines;
    All these keywords.

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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