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Risk, Credit, and Insurance in Peru: Field Experimental Evidence

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  • Galarza, Francisco

Abstract

This paper reports the results of behavioral economic experiments conducted in Peru to examine the relationship amongst risk preferences, loan take-up, and insurance purchase decisions. This area-based yield insurance can help reduce people's vulnerability to large scale covariate shocks, and can also lower the loan default probability under extreme negative covariate shocks. In a context of collateralized formal credit markets, we provide suggestive evidence that insurance may help reduce the fear of losing collateral that prevents potential borrowers from taking loans. Framing these experiments to recreate a real life situation, we started with a Baseline Game where subjects had to choose between a fallback production project and an uninsured loan.We then introduced a third project choice--loan with yield insurance (Insurance Game)--which allows us to measure the effect of introducing insurance on the demand for loans. Overall, more than 50 percent of the subjects are willing to buy insurance in this insurance game. Further, controling for choices made in the baseline game, covariate shocks experienced earlier, and previous rounds' winnings, we find that the decision to take the insured loan (uninsured loan) rather than any of the other two projects is predicted by wealth and lower (higher) levels of risk aversion. Interestingly, this relationship with risk aversion continues to hold when we control for the overweighting of low-probability events observed in the data.

Suggested Citation

  • Galarza, Francisco, 2009. "Risk, Credit, and Insurance in Peru: Field Experimental Evidence," MPRA Paper 17833, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:17833
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    File URL: https://mpra.ub.uni-muenchen.de/17833/1/MPRA_paper_17833.pdf
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    References listed on IDEAS

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    Cited by:

    1. Galarza, Francisco, 2009. "Choices under Risk in Rural Peru," MPRA Paper 17708, University Library of Munich, Germany.
    2. Mullally, Conner & Boucher, Stephen R. & Carter, Michael R., 2010. "Perceptions and Participation: Mistaken Beliefs, Encouragement Designs, and Demand for Index Insurance," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61002, Agricultural and Applied Economics Association.

    More about this item

    Keywords

    area-yield insurance; credit; covariate risk; idiosyncratic risk; risk aversion; probability weighting; experimental economics; Peru;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments

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