A Theory of Rational Demand for Index Insurance
Rational demand for hedging products, where there is a risk of contractual nonperformance, is fundamentally different to that for indemnity insurance.� In particular, optimal demand is zero for infinitely risk averse individuals, and is nonmonotonic in risk aversion, wealth and price.� For commonly used families of utility functions, demand is hump-shaped in the degree of risk aversion when the price is actuarially unfair, first increasing then decreasing, and either decreasing or decreasing-increasing-decreasing in risk aversion when the price is actuarially favourable.� For a given belief, upper bound are derived for the optimal demand from risk averse and decreasing absolute risk averse decision makers.� The apparently low level of demand for consumer hedging instruments, particularly from the most risk averse, is explained as a rational response to deadweight costs and the risk of countractual nonperformance.� A numerical example is presented for maize in a developing county which suggests that some unsubsidised weather derivatives, currently being designed for and marketed to poor farmers, may in fact be poor products, in that objective financial advice would recommend�low or zero purchase from all risk averse expected utility maximisers.
|Date of creation:||01 Oct 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.economics.ox.ac.uk/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Robert M. Townsend & Shawn Cole & Jeremy Tobacman & Xavier Gine & James Ian Vickery & Petia Topalova, 2012.
"Barriers to Household Risk Management; Evidence from India,"
IMF Working Papers
12/195, International Monetary Fund.
- Shawn Cole & Xavier Gine & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2013. "Barriers to Household Risk Management: Evidence from India," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 104-35, January.
- Petia Topalova & Shawn Cole & Xavier Gene & Jeremy Tobacman & Robert Townsend & James Vickery, 2011. "Barriers to Household Risk Management: Evidence from India," Working Papers id:4293, eSocialSciences.
- Shawn Cole & Xavier Giné & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2009. "Barriers to household risk management: evidence from India," Staff Reports 373, Federal Reserve Bank of New York.
- Cole, Shawn & Gine, Xavier & Tobacman, Jeremy & Topalova, Petia & Townsend, Robert & Vickery, James, 2010. "Barriers to household risk management : evidence from India," Policy Research Working Paper Series 5504, The World Bank.
- Hongbin Cai & Yuyu Chen & Hanming Fang & Li-An Zhou, 2009.
"Microinsurance, Trust and Economic Development: Evidence from a Randomized Natural Field Experiment,"
PIER Working Paper Archive
09-034, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Hongbin Cai & Yuyu Chen & Hanming Fang & Li-An Zhou, 2009. "Microinsurance, Trust and Economic Development: Evidence from a Randomized Natural Field Experiment," NBER Working Papers 15396, National Bureau of Economic Research, Inc.
- Carter, Michael R. & Galarza, Francisco & Boucher, Stephen, 2007. "Underwriting area-based yield insurance to crowd-in credit supply and demand," MPRA Paper 24326, University Library of Munich, Germany.
- Mahul, Olivier & Verma, Niraj & Clarke, Daniel J., 2012. "Improving farmers'access to agricultural insurance in India," Policy Research Working Paper Series 5987, The World Bank.
- Daniel J. Clarke, 2011. "A Theory of Rational Demand for Index Insurance," Economics Series Working Papers 572, University of Oxford, Department of Economics.
- Gine, Xavier & Townsend, Robert & Vickery, James, 2007.
"Statistical analysis of rainfall insurance payouts in southern India,"
Policy Research Working Paper Series
4426, The World Bank.
- Xavier Giné & Robert Townsend & James Vickery, 2007. "Statistical Analysis of Rainfall Insurance Payouts in Southern India," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(5), pages 1248-1254.
- Daniel J. Clarke, 2011. "Reinsuring the Poor: Group Microinsurance Design and Costly State Verification," Economics Series Working Papers 573, University of Oxford, Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:oxf:wpaper:572. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Caroline Wise)
If references are entirely missing, you can add them using this form.