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Subsidy Policies and Insurance Demand

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  • Jing Cai
  • Alain de Janvry
  • Elisabeth Sadoulet

Abstract

Many new products presumed to be privately beneficial to the poor have a high price elasticity of demand and ultimately zero take-up rate at market price. This has led governments and donors to provide subsidies to increase take-up, with the concern of trying to limit their cost. In this study, we use data from a two-year field experiment in rural China to define the optimum subsidy scheme that can insure a given take-up for a new weather insurance for rice producers. We build a model that includes the forces that are known to be determinants of insurance demand, provide reduced form confirmation of their importance, validate the dynamic model with out-of-sample predictions, and use it to conduct policy simulations. Results show that the optimum current subsidy necessary to achieve a desired take-up rate depends on both past subsidy levels and past payout rates, implying that subsidy levels should vary locally year-to-year.

Suggested Citation

  • Jing Cai & Alain de Janvry & Elisabeth Sadoulet, 2016. "Subsidy Policies and Insurance Demand," NBER Working Papers 22702, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22702
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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

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