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After the Drought: The Impact of Microinsurance on Consumption Smoothing and Asset Protection

Author

Listed:
  • Sarah A. Janzen
  • Michael R. Carter

Abstract

To cope with shocks, poor households with inadequate access to financial markets can sell assets to smooth consumption and, or reduce consumption to protect assets. Both coping strategies can be economically costly and contribute to the transmission of poverty, yet limited evidence exists regarding the effectiveness of insurance to mitigate these costs in risk-prone developing economies. Utilizing data from an RCT in rural Kenya, this paper estimates that on average an innovative microinsurance scheme reduces both forms of costly coping. Threshold econometrics grounded in theory reveal a more complex pattern: (i) wealthier households primarily cope by selling assets, and insurance makes them 96 percentage points less likely to sell assets following a shock; (ii) poorer households cope primarily by cutting food consumption, and insurance reduces by 49 percentage points their reliance on this strategy.

Suggested Citation

  • Sarah A. Janzen & Michael R. Carter, 2013. "After the Drought: The Impact of Microinsurance on Consumption Smoothing and Asset Protection," NBER Working Papers 19702, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19702
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    References listed on IDEAS

    as
    1. Francesca de Nicola, 2011. "The Impact of Weather Insurance on Consumption, Investment, and Welfare," 2011 Meeting Papers 548, Society for Economic Dynamics.
    2. Dean Karlan & Robert Osei & Isaac Osei-Akoto & Christopher Udry, 2014. "Agricultural Decisions after Relaxing Credit and Risk Constraints," The Quarterly Journal of Economics, Oxford University Press, vol. 129(2), pages 597-652.
    3. Russell Toth, 2015. "Traps and Thresholds in Pastoralist Mobility," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 97(1), pages 315-332.
    4. Carter, Michael R. & Little, Peter D. & Mogues, Tewodaj & Negatu, Workneh, 2007. "Poverty Traps and Natural Disasters in Ethiopia and Honduras," World Development, Elsevier, vol. 35(5), pages 835-856, May.
    5. Hill, Ruth Vargas & Viceisza, Angelino, 2010. "An experiment on the impact of weather shocks and insurance on risky investment," IFPRI discussion papers 974, International Food Policy Research Institute (IFPRI).
    6. John McPeak & Sommarat Chantarat & Andrew Mude, 2010. "Explaining index-based livestock insurance to pastoralists," Agricultural Finance Review, Emerald Group Publishing, vol. 70(3), pages 333-352, November.
    7. Jing Cai, 2016. "The Impact of Insurance Provision on Household Production and Financial Decisions," American Economic Journal: Economic Policy, American Economic Association, vol. 8(2), pages 44-88, May.
    8. Sommarat Chantarat & Andrew G. Mude & Christopher B. Barrett & Michael R. Carter, 2013. "Designing Index-Based Livestock Insurance for Managing Asset Risk in Northern Kenya," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(1), pages 205-237, March.
    9. Kazianga, Harounan & Udry, Christopher, 2006. "Consumption smoothing? Livestock, insurance and drought in rural Burkina Faso," Journal of Development Economics, Elsevier, vol. 79(2), pages 413-446, April.
    10. Ahmed Mushfiq Mobarak & Mark Rosenzweig, 2012. "Selling Formal Insurance to the Informally Insured," Working Papers 1007, Economic Growth Center, Yale University.
    11. Santos, Paulo & Barrett, Christopher B., 2011. "Persistent poverty and informal credit," Journal of Development Economics, Elsevier, vol. 96(2), pages 337-347, November.
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    Citations

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    Cited by:

    1. Takahashi, Kazushi & Ikegami, Munenobu & Sheahan, Megan & Barrett, Christopher B., 2014. "Quasi-experimental evidence on the drivers of index-based livestock insurance demand in Southern Ethiopia," IDE Discussion Papers 480, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    2. repec:oup:apecpp:v:39:y:2017:i:2:p:199-219. is not listed on IDEAS
    3. repec:eee:deveco:v:129:y:2017:i:c:p:14-28 is not listed on IDEAS
    4. Carter, Michael & Morrow, John, 2014. "The political economy of inclusive rural growth," LSE Research Online Documents on Economics 60268, London School of Economics and Political Science, LSE Library.
    5. repec:pal:gpprii:v:42:y:2017:i:2:d:10.1057_s41288-016-0035-y is not listed on IDEAS
    6. Ayako Matsuda & Takashi Kurosaki, 2017. "Temperature and Rainfall Index Insurance in India," OSIPP Discussion Paper 17E002, Osaka School of International Public Policy, Osaka University.
    7. repec:cup:endeec:v:23:y:2018:i:03:p:369-389_00 is not listed on IDEAS
    8. Stephan Dietrich & Marcela Ibanez, 2015. "Impact of Weather Insurance on Small Scale Farmers: A Natural Experiment," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 165, Courant Research Centre PEG.
    9. Hill, Ruth Vargas & Kumar, Neha & Magnan, Nicholas & Makhija, Simrin & de Nicola, Francesca & Spielman, David J. & Ward, Patrick S., 2017. "Insuring against droughts: Evidence on agricultural intensification and index insurance demand from a randomized evaluation in rural Bangladesh," IFPRI discussion papers 1630, International Food Policy Research Institute (IFPRI).
    10. repec:esx:essedp:764 is not listed on IDEAS
    11. Chiara FALCO & Douch KONG & Valentina ROTONDI & Valeria SPELTA, 2016. "Investment, Insurance and Weather Shocks: Evidence from a Lab Experiment in Cambodia," Departmental Working Papers 2016-10, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    12. repec:pal:gpprii:v:42:y:2017:i:4:d:10.1057_s41288-017-0060-5 is not listed on IDEAS
    13. Ibanez, Marcela & Dietrich, Stephan, 2015. "Impact of Weather Insurance on Small Scale Farmers: A Natural Experiment," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112887, Verein für Socialpolitik / German Economic Association.
    14. Carter, Michael R. & Janzen, Sarah A., 2018. "Social protection in the face of climate change: targeting principles and financing mechanisms," Environment and Development Economics, Cambridge University Press, vol. 23(03), pages 369-389, June.

    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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