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Barriers to household risk management : evidence from India

  • Cole, Shawn
  • Gine, Xavier
  • Tobacman, Jeremy
  • Topalova, Petia
  • Townsend, Robert
  • Vickery, James

Why do many households remain exposed to large exogenous sources of non-systematic income risk? This paper uses a series of randomized field experiments in rural India to test the importance of price and non-price factors in the adoption of an innovative rainfall insurance product. The analysis finds that demand is significantly price-elastic, but that even if insurance were offered with payout ratios similar to US, widespread coverage would not be achieved. The paper identifies key non-price frictions that limit demand: liquidity constraints, particularly among poor households, lack of trust, and limited salience. The authors suggest potential improvements in contract design to mitigate these frictions.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5504.

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Date of creation: 01 Dec 2010
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Handle: RePEc:wbk:wbrwps:5504
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