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Time vs. state in insurance: experimental evidence from contract farming in Kenya

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Abstract

The gains from insurance arise from the transfer of income across states. Yet, by requiring that the premium be paid upfront, standard insurance products also transfer income across time. We show that this intertemporal transfer can help explain low insurance demand, especially among the poor, and in a randomized control trial in Kenya we test a crop insurance product which removes it. The product is interlinked with a contract farming scheme: as with other inputs, the buyer of the crop offers the insurance and deducts the premium from farmer revenues at harvest time. The take-up rate is 72%, compared to 5% for the standard upfront contract, and take-up is highest among poorer farmers. Additional experiments and outcomes indicate that liquidity constraints, present bias, and counterparty risk are all important constraints on the demand for standard insurance. Finally, evidence from a natural experiment in the United States, exploiting a change in the timing of the premium payment for Federal Crop Insurance, sho s that the transfer across time also affects insurance adoption in developed countries.

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... Aside from the socio-economic, educational, and structural factors mentioned, multiple studies using behavioural economics principles illustrate how different behavioural biases drive crop insurance adoption [3,9,13,16,17,52,72,85,90]. These studies on the adoption of various types of crop insurance schemes have been carried out in India and many developing countries. ...
... Crop insurance demand is also affected by hyperbolic discounting or present bias [17]. Hyperbolic discounting occurs when a person prefers a smaller and quicker reward over a larger and later payoff. ...
... Hence, the current insurance price is weighted as higher than the expected future benefit, indicating low insurance demand. Casaburi and Willis [17] explored hyperbolic discounting in crop insurance in Kenya, concluding that it is the cause of poor crop insurance adoption because farmers feel that the discounting rate of current insurance premium is higher than the future indemnity. According to their findings, adopting pay-at-harvest insurance could enhance the rate of insurance adoption. ...
Article
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Despite decades of sustained efforts by both the national and state governments to enhance the adoption of crop insurance in India, a low adoption rate is continuously reported. Hence, this has become a research issue over the years, and various studies have identified determinants and barriers related to social, economic, educational, and structural factors. There is a dearth of research in the context of behavioural aspects in India, while several empirical pieces of evidence have emerged in this domain from developing and developed countries. This study, therefore, aims to review these two strands of studies by posing two relevant questions: (a) how do different social, economic, educational, and structural factors affect crop insurance adoption in India? and (b) how do different behavioural anomalies affect farmers' decision to adopt crop insurance? In doing so, this study has brought out various research avenues for future studies to be undertaken in India and elsewhere.
... This fact may be related to the limited number of successfully implemented high quality index insurance products, which we discuss below. 4 To cite a few individual studies, Giné et al. (2007), Dercon et al. (2014), Ahmed et al. (2017) or (Casaburi and Willis, 2018) report take-up rates below 5% for some of the products that they analyze. In Ethiopia, 6% to 36% take-up rates are observed by Norton et al. (2011). ...
... One of these factors is timing, as typical insurance products require payments in advance and provide payments later. Casaburi and Willis (2018) report that postponing the payment of insurance premiums until harvest time (instead of requiring upfront payments, months in advance) increased take-up rate from 5% to 72%. 9 These results reveal that addressing liquidity constraints for poor farmers by selling index insurance on credit is an important starting point for generating high demand for the insurance product (the product that we study is also sold on credit, see Section 3). ...
... This made possible to design of a high quality area-yield index insurance product. The insurance is sold before the agricultural season, on credit, which facilitates purchase from liquidity-constrained farmers (Casaburi and Willis, 2018). A farmer group is required to purchase insurance for the entire cotton area cultivated. ...
Article
Index insurance is a promising avenue for addressing risk in developing countries, but pilot index insurance projects are rarely scaled-up because demand remains disappointingly low. This article studies an area-yield insurance product which generated high demand and sales in Burkina Faso, and was subsequently scaled up nationally. We exploit experimental and quasi-experimental variations to measure and compare the effect of price, information, and product quality on insurance demand. Our results suggest that price has an important effect on demand, while information also plays a role. However, the quasi-experimental variation in product quality across farmer groups does not affect insurance take-up. Demand is much lower during the scale-up, suggesting that implementation efforts during the pilot also matter. These findings show that high quality index insurance products can be attractive for farmers, but that price for value, along with other factors, remain major barriers to adoption. Our results also suggest that small-scale farmers may not fully understand the complex financial instruments offered to them commercially, with implications for the use of index insurance as a policy option to foster resilience.
... Many studies have argued that liquidity constraints often limit poor farmer's ability and willingness to take up agricultural insurance (Cole et al., 2013;Karlan et al., 2014). In recent times, however, a number of studies have explored not only the available resources at the disposal of poor farmers, but also the time the insurance products are made available (Belissa et al., 2020;Casaburi & Willis, 2018). An interesting observation is the highly cyclical nature of farmers' incomes, where they tend to have adequate financial resources during harvest periods, but these resources significantly decrease at the onset of the new planting season during which farmers purchase other inputs. ...
... Thus, liquidity constraints do not only limit the purchase of inputs for production purposes, but also play a relevant role in decreasing the tendency for farmers to participate in insurance programs. These findings are in line with the results from Casaburi and Willis (2018), who found that liquidity constraints mattered in farmers' demand for insurance in Kenya. ...
... Trust, which is a social capital variable, plays a relevant role in farmers' participation decisions in insurance programs. Farmers who generally trust people are more willing to participate in crop insurance programs, because they tend to trust that they would receive the compensation in the event of crop failures (Casaburi & Willis, 2018). ...
Article
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This paper analyses smallholder farmers' willingness to participate in crop insurance programs, using recent data from cocoa farmers in Ghana. Given the significance of output uncertainty and imperfect capital and insurance markets, we develop a theoretical framework to analyse how risk and ambiguity aversion, and liquidity constraints influence farmers' crop insurance participation decisions. We employ field experiments to elicit farmers' ambiguity and risk aversion, the stated preference approach to obtain information on farmers' willingness to participate in crop insurance programs, and a discrete choice model to examine the factors that influence their participation decisions. We find that risk preferences, ambiguity aversion, and liquidity constraints influence farmers' willingness to participate in crop insurance programs. The results also reveal that the probability of participating in crop insurance programs is positively influenced by wealth, trust and education of the farmers.
... Interestingly, we show that sophistication is not a unidimensional feature across biases: only a small share of subjects are sophisticated about both present-bias and parent-bias, while a larger share is sophisticated about one but not about the other. 13 Exceptions are Ariely & Wertenbroch (2002); Beshears et al. (2020); Casaburi & Willis (2018); Schilbach (2019). that the allocation set at round 2 is implemented instead of that set at round 1. 14 We find no clear pattern linking AGD preferences to demand for commitment in the lab. ...
... 34 Figure C.2 displays the visual aid the enumerators showed the respondents. 35 We avoided having subjects pay for commitment early rather than later to avoid low take-up driven by impatience (Casaburi & Willis, 2018). ...
... Demand for commitment in the lab is extremely high, surpassing 90% when it comes to the experimental scenario involving within-household allocations, presumably due to delayed payment, such as in Casaburi & Willis (2018). While AGD parents are slightly more likely to take-up commitment than other parents, that difference is driven by substantially higher demand at its lowest price -as commitment price increases, however, demand by AGD parents falls significantly more steeply than among other parents. ...
Article
This paper uses a lab-in-the-field experiment in Malawi to document two new facts about how parents share resources with their children over time. First, for almost a third of study participants, the further in the future consumption is, the more generous are parents’ plans to share it with their children. Second, many participants revise those plans as consumption gets closer, reallocating from children towards themselves – even when consumption is still in the future. None of these patterns can be accounted for by present-bias. Instead, both are consistent with a relevant share of parents discounting their future utility of consumption to a greater extent than that of their children. We document that parents characterized by such asymmetric geometric discounting display sizable preference reversals every period, a phenomenon we denote parent-bias. We find that, despite ambitious plans, those parents actually allocate less to their children in the present than other parents, and that such preferences predict under-investment in children outside the lab just as much as quasi-hyperbolic discounting. Commitment devices designed for present-bias do not mitigate parentbias. Our findings provide a new explanation for under-investment in children and inform the design of new interventions to address it.
... Future research that holistically assesses the crop insurance choice among many alternative insurance products and portfolio choices along with different risk perceptions and preferences of the potential insurance participants can stimulate discussion on improving program design. Understanding and distinguishing the roles of risk and time preferences in the insurance demand context is an on-going and active research area (Andreoni & Sprenger, 2012;Casaburi & Willis, 2018). Another important topic that can contribute to the policy discussion is on the welfare consequences of insurance provisions or related behavioral interventions as some findings have suggested that increases in insurance take-up do not necessarily lead to welfare gains (Harrison, Morsink, & Schneider, 2020;Harrison & Ng, 2016). ...
... In other words, the liquidity constraint can play an important role in the demand for insurance. A recent study by Casaburi and Willis (2018) show that the liquidity constraint can deter the demand for insurance. Therefore, access to credit can affect the demand for insurance but it will apparently depend on the structure of offered credit contracts. ...
Chapter
Risk management in agricultural production is a first order problem as producers’ long-run sustainability often depends on their ability to reduce the adverse effects of profit fluctuations. The purpose of this chapter is to highlight several aspects of the academic literature for which there have been key innovations within the last 10 years, and the topics are likely to remain relevant going forward. We focus on a range of recent empirical findings to demonstrate the breadth of interesting, researchable topics contained in the literature. We also propose a simplistic theoretical model to serve as a road map to the literature. The theoretical model we propose aims to provide a unifying conceptual framework for the recent innovations in the literature where many studies focus on specific and singular parameters. Section 2 provides the simplistic theoretical model that explains the agricultural production decision under risk. Section 3 focuses on on-farm production with modeling nuances related to technology adoption and management of both biotic and abiotic stressors and Section 4 focuses on marketing decisions that can affect output price through forward contracting, hedging, and storage mechanisms. Section 5 shows how the model can be extended to include off-farm decision-making and provides conceptual frameworks for land rental as well as off-farm labor and investment decisions. Section 6 considers the role of both credit-availability and insurance contracts, while Section 7 discusses some potential avenues for generalizing the model to allow for more nuanced risk attitudes both within and beyond the expected utility framework.
... 2 For instance, a large number of studies have found that illiquidity, i.e. not having sufficient cash at hand when the premium payment is due, is negatively associated with WII uptake (Giné et al., 2008;Cole et al., 2012Cole et al., , 2013Hill et al., 2013;Akter et al., 2016;Casaburi & Willis, 2018;Belissa et al., 2019). As well as illiquidity, lack of trust in the provider and/or lack of trust in the product has frequently been found to impede WII uptake ( social scientists from the Stockholm Environment Institute (SEI) to implement the study described in this paper. ...
... A large number of studies have found that liquidity, income and wealth levels are positively associated with WII uptake (Giné et al., 2008;Cole et al., 2012Cole et al., , 2013Hill et al., 2013;Akter et al., 2016;Casaburi & Willis, 2018;Belissa et al., 2019). We therefore investigated two potential means of increasing uptake by taking liquidity concerns into account. ...
Article
The persistence of problems such as endemic poverty, rising inequalities, climate change and biodiversity loss demands us to find solutions which are embedded in a highly complex web of interacting social, technological, and ecological processes. Service design (SD), an approach to directly involve citizens in the development and improvement of services and systems, shows promise as a tool to support the design of interventions to address complex development challenges in the Global South. In this paper we describe how service design was used alongside discrete choice experiments (DCEs) to inform the design of a Weather Index Insurance product for small holder farmers in Uganda. As part of the service design process, we used archetypes to capture and articulate the multiple vulnerabilities of farmers and quickly test prototype insurance packages to identify important design features. DCEs tested promising design features in a manner that complemented as well as triangulated the service design phase. The results of both phases were used to inform the design of a WII product that has been taken up by major insurance providers in Uganda. The approach complements and builds on qualitative work typically done to inform DCEs by opening up space for research participants to question core assumptions, and by involving respondents directly in the process of designing a future service.
... Another obvious impediment for poor households is lack of liquidity. The liquidity problem is aggravated by the possibility that the marginal utility of cash or income may not be consistent over time-varying across the seasons in accordance with income flows (Casaburi and Willis 2016). Insurance premiums are typically due when cash is scarce and any pay-outs are received after harvesting, when the marginal utility of cash is relatively low. ...
... Delayed payment of insurance premiums, or bundling insurance with credit, attenuates the liquidity issue (e.g. Casaburi and Willis 2016). Perhaps a combination of such interventions will cause the insurance market in Africa to develop. ...
Article
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Agricultural (index) insurance for smallholders in developing countries has gained traction in academic and policy circles. The expectation is that the uptake of insurance will protect smallholders from production shocks and incentivize them to modernize production. We develop a simple theoretical model to demonstrate that the welfare effects of insurance are fundamentally ambiguous—even in the absence of transaction costs or basis risk. The second-best nature of the institutional context within which smallholders operate implies that the uptake of insurance may accentuate pre-existing inefficiencies. This idea is worked out in detail for the case of livestock herding on common grazing lands. Our theoretical model predicts that insurance invites overstocking of communal lands, and lowers the profitability of herding when common pastures are degraded.
... Factors of supporting policies and programs-policy aspect: support and motivations from the government and other organizations play a crucial role in building and enhancing CF schemes and strongly influence the decision of farmers and firms on participation in CF (Wang et al., 2014b). Supporting policies and programs may provide various support measures, such as technical and financial support, training, advisory service, marketing plan, credit access, market access, and insurance (Bellemare, 2010;Casaburi & Willis, 2018). However, Ragasa et al. (2018) found a negative correlation between the presence of public development projects and CF success. ...
Article
This study aims to explore the determinants of farmers' participation in contract farming by using a qualitative approach and empirically assess the impact of the factors withdrawn from the qualitative analysis and previous studies by employing the probit model in Vietnam. The qualitative analysis illustrates 10 original factors that affect farmers' participation in contract farming, including cooperative membership, quality certifications, sale preferences, farming difficulties, technology, supporting policy and program, estimation of oversupply, market information flow, association membership, and experience of contract farming failure. The quantitative analysis provides empirical evidence that female heads, firm consulting activities, firm scales, cooperative membership, quality certifications, and good‐road locations can significantly and positively influence farmers' participation in contract farming. Cooperative membership and quality certifications are the most important factors. Contrary to the expectation, head education and good soil negatively impact farmers' participation in contract farming. Besides, bad soil can hinder farmers from participating in contract farming. [EconLit Citations: C12, L24, O13, O14, Q12, Q18].
... In practice, however, crop insurance (and its newer variant: indexbased rainfall insurance) has been particularly difficult product to sell to farmers. Casaburi and Willis (2018), for example, show that only 5 percent of Kenyan sugarcane farmers in their sample purchased rainfall insurance, a finding that reinforces the sense that potential customers are wary of these prod ucts, might not understand or trust them, are content to rely on informal mech an isms, and/or find the products too poorly designed or too expensive. Casaburi and Willis, however, use an RCT to experiment with the timing of when the insurance is sold. ...
Article
In October 2019, Abhijit Banerjee, Esther Duflo, and Michael Kremer jointly won the 51st Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel "for their experimental approach to alleviating global poverty." But what is the exact scope of their experimental method, known as randomized control trials (RCTs)? Which sorts of questions are RCTs able to address and which do they fail to answer? This book provides answers to these questions, explaining how RCTs work, what they can achieve, why they sometimes fail, how they can be improved and why other methods are both useful and necessary. Chapters contributed by leading specialists in the field present a full and coherent picture of the main strengths and weaknesses of RCTs in the field of development. Looking beyond the epistemological, political, and ethical differences underlying many of the disagreements surrounding RCTs, it explores the implementation of RCTs on the ground, outside of their ideal theoretical conditions and reveals some unsuspected uses and effects, their disruptive potential, but also their political uses. The contributions uncover the implicit worldview that many RCTs draw on and disseminate, and probe the gap between the method's narrow scope and its success, while also proposing improvements and alternatives. This book warns against the potential dangers of their excessive use, arguing that the best use for RCTs is not necessarily that which immediately springs to mind, and offering opportunity to come to an informed and reasoned judgement on RCTs and what they can bring to development.
... Deferring the payment of insurance premiums for a given agricultural season until after harvest, when resources are more readily available, can thus ease liquidity constraints and ameliorate trust issues. Studies have found that such premium deferral increases take-up, with estimates of increased demand ranging from 8 to 72 percentage points (Liu et al. 2020, Belissa et al. 2019, Casaburi & Willis 2018. Promising as this design may seem, however, it is akin to providing the farmer with a loan equivalent to the insurance premium for the duration of the season. ...
Article
Full-text available
Innovations in agricultural index insurance have raised expectations that the private sector can overcome shortcomings associated with more traditional indemnity-based products like multiperil crop insurance and strengthen agricultural risk management at scale across developing countries. This article updates previous reviews on agricultural insurance but differs in that it goes beyond the prognosis that recent innovations can help make insurance more commercially viable. As such, it addresses two important challenges that have received limited attention. First, it distinguishes different types of farm households and recognizes that many are excluded from the insurance market, describing additional innovations that can help make insurance more accessible to these excluded groups. Second, it acknowledges that insurance for catastrophic risks is unaffordable for most farmers and summarizes new developments in disaster assistance and safety net programs that can provide broader protection against these risks. The review concludes that cost-benefit analyses of subsidized insurance programs will be crucial for guiding public spending decisions. Expected final online publication date for the Annual Review of Resource Economics, Volume 14 is October 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
... This unexplained low demand for formal insurance may be due to informal and self insurance options available to households (Giesbert et al. 2011;Gollier 2003;Townsend 1994). Other factors that potentially depress demand, are not captured by our model and so enter the residual if they influence the stated WTP include poor understanding of the insurance concept (Basaza et al. 2008;Platteau 1997), perceived low quality of the medical providers the insurance covers (Basaza et al. 2008;De Allegri et al. 2006), liquidity constraints (Cole et al. 2013;Giné et al. 2008;Liu and Myers 2016), time preference (Baillon et al. 2021;Casaburi and Willis 2018), lack of trust in the insurance product (Cai et al. 2015;Chemin 2018;Cole et al. 2013;Dercon et al. 2015;Giné et al. 2008) -particularly in the presence of ambiguity aversion (Bryan 2018;Elabed and Carter 2015) -and, related to this, default risk (Doherty and Schlesinger 1990;Liu and Myers 2016;Wakker et al. 1997). 11 We establish that these extraneous factors, in aggregate, contribute half as much to the deficit of WTP from the fair price as does risk attitude, on average. ...
Article
Full-text available
Despite widespread exposure to substantial medical expenditure risk in low-income populations, health insurance enrollment is typically low. This is puzzling from the perspective of expected utility theory. To help explain it, this paper introduces a decomposition of the stated willingness to pay (WTP) for insurance into its fair price and three behavioral deviations from that price due to risk perception and risk attitude consistent with prospect theory, plus a residual. To apply this approach, we elicit WTP, subjective distributions of medical expenditures and risk attitude (utility curvature and probability weighting) from Filipino households in a nationwide survey. We find that the mean stated WTP of the uninsured is less than both the actuarially fair price and the subsidized price at which public insurance is offered. This is not explained by downwardly biased beliefs: both the mean and the median subjective expectation are greater than the subsidized price. Convex utility in the domain of losses pushes mean WTP below the fair price and the subsidized price, and the transformation of probabilities into decision weights depresses the mean further, at least using one of two specific decompositions. WTP is reduced further by factors other than risk perception and attitude.
... This corresponds to the downside basis risk faced by the consumer if she purchases index insurance. Similarly, q + r − p corresponds to an upside basis risk where an insured agent does not suffer an aggregate shock and yet payouts are triggered.4 Note that both downside and upside basis risks are increasing in r. ...
Article
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The question of how informal institutions interact with formal markets is a central economic question, particularly in developing countries. We analyze this issue for the demand of an innovative weather insurance product. Specifically, when does informal risk-sharing act as barrier or support to the take-up of index-based insurance? The presence of an individual in a risk-sharing arrangement reduces her risk aversion, termed “Effective Risk Aversion”— a sufficient statistic for index decision making. Our analysis establishes that such reduction in risk aversion can lead to either reduced or increased take up of index insurance. These results provide alternative explanations for two empirical puzzles: unexpectedly low takeup for index insurance and demand being particularly low for the most risk averse. From a policy perspective, our results highlight how the combination of premium subsidies and informal networks might promote take-up and how this might eventually facilitate better protection against weather risks.
... Facilitating frictionless exchanges between producers and buyers using transparent and enforceable contracts can deepen markets. Scalable interventions which can be explored include (i) government guaranteed bulk purchases 41 , (ii) Out-grower contracts similar to those in Kenya (Casaburi and Macchiavello 2016) (iii) Insurance contracts with premiums charged at harvest (Casaburi and Willis, 2017) in Kenya, and (iv) digital trading platforms such as Kudu in Uganda and G-Soko in Kenya. Timely access to accurate market information reduces regional price dispersion, enabling farmers to respond to market incentives (Aker, 2010). ...
Chapter
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The Chapter analyses how Uganda can reap the demographic dividend and spur economic growth. Uganda has one of the youngest population in the world with abundant natural resources; therefore making sure that appropriate capacity for this population to sustainably use the resources is very critical in ensuring the countries sustainable development agenda and green growth strategy. This Uganda's example can be used by many developing countries that have simmilar characteristics.
... In a related paper within the context of automobile insurance, Cohen (2006) studies the trade-off between aggregate and per-event deductibles, but focuses on a set of issues more relevant to auto insurance. 5 Other work shows that the periodicity of payments, such as crop insurance premiums (Casaburi and Willis, 2018), paychecks (Parsons andVan Wesep, 2013), andFood Stamp benefits (Shapiro, 2005), is an important consideration for welfare. Our paper suggests that the time aggregation embedded in health insurance deductible policies can also have non-trivial impacts on welfare. ...
... Moreover, agribusinesses have additional advantages over formal banks with regard to agricultural lending since agribusiness can control the quality of the production inputs that they provide (Abebe et al., 2013;Grosh, 1994) and have an intrinsic motivation to ensure high quality produce (Marcoul & Veyssiere, 2010). As a result, agribusinesses have higher incentives to monitor farmers and their credit behavior than formal banks and thus tend to have more information on farmers' resource endowments and expected 1 Similarly, Casaburi and Willis (2018) show that contract farming can substantially improve agricultural insurance markets. Through contract farming, farmers do not have to pay insurance premiums before the planting season, since they can commit credibly to pay the insurance premium at harvest time. ...
Article
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Access to credit is a key prerequisite for the development of smallholder agriculture. However, rural credit markets are typically characterized by market failures and smallholder credit access is limited. Resource‐providing contracts are an institutional tool to overcome credit market failures through the provision of production inputs in the form of in‐kind credit. Previous research has shown that interlinkage of contract and credit helps farmers overcome financial constraints, foster production investments, and hence increase productivities and income. However, if and how such contract schemes affect farmers' overall demand for and access to formal credit from other sources is not yet well understood. In this article, we therefore investigate the associations of the provision of in‐kind credit and farming households' formal credit demand and ability to receive formal credit. We use data of 463 oil palm producers in Ghana and show that participation in contract farming is associated with an increase in credit demand. Concerning credit approval, we find that the outstanding debt of the in‐kind credit scheme is associated with a substantially lower likelihood of credit acceptance. However, the results also suggest that farmers can fully compensate this negative effect by informing the bank about the contract, and thus the source of the debt. This indicates that debt acquired from resource‐providing contract schemes does not necessarily pose an additional credit constraint to farmers. [EconLit Citation G21, G23, O16, O17].
... Although promising and showing favorable results where adopted, index insurance has generally experienced frustratingly low uptake levels and widespread commercial upscale is yet to be realized. Two factors have been identified as the cause for the poor uptake of the products: 1) liquidity constraints, affordability, and willingness to pay among the small-scale farmers (Ali et al. 2020;Binswanger-Mkhize 2012;Casaburi and Willis 2018;Chantarat et al. 2017;Liu et al. 2020;Smith and Watts 2019); and 2) inherent intertemporal and spatial basis risk (Barnett and Mahul 2007;Jensen andBarrett 2017, 2016;Norton et al. 2012;Tadesse et al. 2015). ...
Article
Weather index insurance (WII) has been a promising innovation that protects smallholder farmers against drought risks and provides resilience against adverse rainfall conditions. However, the uptake of WII has been hampered by high spatial and intra-seasonal basis risk. To minimize intra-seasonal basis risk, the standard approaches to designing WII based on seasonal cumulative rainfall have shown to be ineffective in some cases as they do not incorporate different water requirements across each phenological stage of crop growth. One of the challenges in incorporating crop phenology in insurance design is to determine the water requirement in crop growth stages. Borrowing from agronomy, crop science, and agro-meteorology we adopt evapotranspiration methods in determining water requirements for a crop to survive in each stage, that can be used as a trigger level for a WII product. Using daily rainfall and evapotranspiration data, we illustrate the use of Monte Carlo risk modelling to price an operational WII and WII-linked credit product. The risk modelling approach we develop includes incorporation of correlation between rainfall and evapotranspiration indexes that can minimise significant intertemporal basis risk in WII.
... 23 At the time of the study, Inclusive Guarantee was known as PlaNet Guarantee. purchase the insurance (Casaburi and Willis 2018). Farmer groups had to collectively decide whether or not to purchase the insurance. ...
Article
This paper examines whether agricultural insurance can boost investment by small scale farmers in West Africa. It is based on a randomized evaluation designed to analyze the impacts of index insurance for cotton farmers in Burkina Faso. No impact of insurance was found on cotton, but, consistent with microeconomic theory, significant spillover impacts on investment in other agricultural activities were measured. Furthermore, the effects of insurance payouts on farmers hit by a shock confirm the potential of index insurance as a risk-management tool. However, this research uncovers important flaws in the implementation of the project that limited its impact on cotton. Overall, this study suggests a promising role for index insurance in stimulating investment, but also draws attention to key challenges to the efficient delivery of insurance to small farmers. Finally, the study’s hybrid, mixed methods RCT offers lessons for the evaluation of complex interventions where trust, understanding, and timing are all important.
... Recent empirical examples include Casaburi and Willis (2018), who examine liquidity constraints within insurance contracts in Kenya, Blouin and Macchiavello (2019), who consider the role of counterparty risk in production contracts in Rwanda, Burchardi et al. (2019), who investigate the incentive effect of tenancy contracts in Uganda, and Casaburi and Macchiavello (2019), who study commitment devices for incomplete contracts in Kenya. We show that careful design of agricultural production contracts can relax constraints and reduce risk for farming households, allowing them to commercialize and contribute to the process of rural transformation. ...
Article
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Contract farming has emerged as a popular mechanism to encourage vertical coordination in developing country agriculture. Yet, there is a lack of consensus on its ability to spur structural transformation in rural economies. We present results from a field experiment on contract farming in a developing country. While all contracts have positive effects on welfare and productivity measures, we find that the simplest contract has impacts nearly as large as contracts with additional attributes. This suggests that once price risk is resolved through the offer of a fixed-price contract, farmers are able to address other constraints on their own.
... Numerous studies have shown that credit market failures constrain farmers' adoption of new agricultural technologies (see Dethier and Effenberger 2011). Credit allows farmers to move capital between two periods, from an initial investment at planting time to harvest time, when sales generate wealth that would not occur in the absence of that initial investment (Casaburi and Willis 2018). Credit therefore smooths wealth levels over time in anticipation of profitable entrepreneurial success by financing the initial investment needed for an entrepreneurial project. ...
Book
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Link to the book in French and in English https://openknowledge.worldbank.org/handle/10986/34919 https://www.afd.fr/fr/ressources/les-systemes-agroalimentaires-en-afrique
... Inexpensively implementing this type of index insurance might be possible when commercial organizations in tight value chains already collect production data from farmers as part of their commercial operations. Examples include the Kenyan sugarcane contract farming operation described in ref. [61] and Burkina Faso's monopsonistic (single-buyer) cotton production environment featured in refs [60,62]. Outside of these environments, however, area-yield insurance based on field measurements quickly becomes expensive to implement, with the cost increasing as the size of the insurance zone decreases and the total number of farm-level measurements increases. ...
Article
The increasing availability of satellite data at higher spatial, temporal and spectral resolutions is enabling new applications in agriculture and economic development, including agricultural insurance. Yet, effectively using satellite data in this context requires blending technical knowledge about their capabilities and limitations with an understanding of their influence on the value of risk-reduction programmes. In this Review, we discuss how approaches to estimate agricultural losses for index insurance have evolved from costly field-sampling-based campaigns towards lower-cost techniques using weather and satellite data. We identify advances in remote sensing and crop modelling for assessing agricultural conditions, but reliably and cheaply assessing production losses remains challenging in complex landscapes. We illustrate how an economic framework can be used to gauge and enhance the value of insurance based on earth-observation data, emphasizing that even as yield-estimation techniques improve, the value of an index insurance contract for the insured depends largely on how well it captures the losses when people suffer most. Strategically improving the collection and accessibility of reliable ground-reference data on crop types and production would facilitate this task. Audits to account for inevitable misestimation complement efforts to detect and protect against large losses.
... Harvest and Processing: The coffee cherry is the fruit of the coffee tree. Cherries are ripe when they change color from green to red, at which point they should be 7 There has been renewed interest in interlinked transactions in agricultural chains in developing countries (see, e.g, Emran et al. (2020) Casaburi and Macchiavello (2019), Casaburi and Willis (2018) for recent contributions). The literature typically focuses on a single interlinkage at a time (credit, saving, insurance) while we focus on bundles of complementary interlinked transactions and study how they are affected by competition. ...
Article
How does competition affect market outcomes when formal contracts are not enforceable and parties’ resort to relational contracts? Difficulties with measuring relational contracts and dealing with the endogeneity of competition have frustrated attempts to answer this question. We make progress by studying relational contracts between upstream farmers and downstream mills in Rwanda’s coffee industry. First, we identify salient dimensions of their relational contracts and measure them through an original survey of mills and farmers. Second, we take advantage of an engineering model for the optimal placement of mills to construct an instrument that isolates geographically determined variation in competition. Conditional on the suitability for mills’ placement within the catchment area, we find that mills surrounded by more suitable areas: (i) face more competition from other mills; (ii) use fewer relational contracts with farmers; and (iii) exhibit worse performance. An additional competing mill also (iv) reduces the aggregate quantity of coffee supplied to mills by farmers and (v) makes farmers worse off. Competition hampers relational contracts directly by increasing farmers’ temptation to default on the relational contract and indirectly by reducing mills’ profits.
... Shee et al. (2015) conducted a field-based feasibility of RCC with Kenyan pastoralists and dairy farmers. Casaburi and Willis (2018) implemented insurance-linked contract farming and found a 72% take-up rate. These papers investigate bundled products where agricultural risks are linked to loans directly made to farmers or agribusiness. ...
Article
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We employ a discrete choice experiment to elicit demand and supply side preferences for insurance‐linked credit, a promising market‐based tool for managing agricultural weather risks and providing access to credit for farmers. We estimate preference heterogeneity using primary data from smallholder farmers and managers of lenders/insurers combined with household socio‐economic survey data in Kenya. We analyse the choice data using maximum simulated likelihood and Hierarchical Bayes estimation of a mixed logit model. Although there are some similarities, we find that there is conflicting demand and supply side preferences for credit terms, collateral requirements, and loan use flexibility. We also analyse willingness to buy and willingness to offer for farmers and suppliers, respectively, for the risk premium for different attributes and their levels. Identifying the preferred attributes and levels for both farmers and financial institutions can guide optimal packaging of insurance and credit providing market participation and adoption motivation for insurance‐bundled credit product.
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Interference across competing firms in RCTs can be informative about market structure. An experiment that subsidizes a random subset of traders who buy cocoa from farmers in Sierra Leone illustrates this idea. Interpreting treatment-control differences in prices and quantities purchased from farmers through a model of Cournot competition reveals differentiation between traders is low. Combining this result with quasi-experimental variation in world prices shows that the number of traders competing is 50 percent higher than the number operating in a village. Own-price and cross-price supply elasticities are high. Farmers face a competitive market in this first stage of the value chain. (JEL L13, L14, O13, Q12, Q13)
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Research shows that risk management will be key if an agricultural transformation that includes the smallholder farm sector is to occur in sub‐Saharan Africa and South Asia. While the smallholder farm sector has historically had poor access to financial and other risk management tools, digital technologies are rapidly impacting the cost and availability of savings, credit, and insurance services in remote rural regions. While these services are all different ways of moving money through time, and thus would seem to be substitutes for each other, they are characterized by quite different pre‐requisites in terms of trust and understanding, and in terms of required tangible and reputational assets. This observation suggests that resilience and an inclusive agricultural transformation might be best promoted by a flexible system that offers indexed risk management tools that can meet the needs of households that enjoy different assets and beliefs. This article lays out this logic and models the use and impacts of a system of flexible financial tools for risk management and an inclusive agricultural transformation. Key findings include that farmers will optimally combine all three financial instruments. The model also shows that these combined financial risk management tools are by themselves sufficient to induce agricultural intensification for less poor, but not for the deeply poor households who have already been decapitalized by shocks.
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Low insurance take‐up in low‐income populations is not easily explained by the standard single‐period expected utility model of insurance that overlooks the relevance of time preference when liquidity is constrained. We design field survey instruments to elicit quasi‐hyperbolic time preferences, as well as prospect theory risk preferences, and use them to examine whether time preferences explain health insurance behavior of low‐income Filipinos. Consistent with theory, those with stronger parameterized time preference are less likely to insure and the partial association is most pronounced at low wealth where liquidity is most likely to be constrained. Among those with better understanding of insurance, lower take‐up is also associated with present bias. We do not find that insurance is significantly associated with risk preferences.
Chapter
We present an overview of the literature on agri-food value chains in low- and middle-income countries. Starting from farmers’ decision of whether to move away from subsistence agriculture to participate in agri-food value chains, we study the process whereby agricultural commodities make their way from the farm gate to the final consumer, documenting the procurement relationships that arise and the organization of markets at every step of the way. In each step, we take stock of the empirical evidence, critically assess the research so far, and offer a number of directions for future research. We further discuss the challenges and opportunities for global agri-food value chains.
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Insurance is typically viewed as a mechanism for transferring resources from good to bad states. However, insurance may also transfer resources from high-liquidity periods to low-liquidity periods. We test for this type of transfer from health insurance by studying the distribution of Social Security checks among Medicare recipients. When Social Security checks are distributed, prescription fills increase by 6–12 percent among recipients who pay small copayments. We find no such pattern among recipients who face no copayments. The results demonstrate that more complete insurance allows recipients to consume healthcare when they need it rather than only when they have cash. (JEL D82, G22, H55, I13, I18, L65)
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Despite women's large contributions to agricultural production in developing countries, they are often excluded from market-facing activities. There is little evidence on how to increase their participation in commercial agriculture. We designed a private sector intervention to encourage male outgrowers in Uganda to transfer a sugarcane contract to their wife or to register a previously uncontracted block in her name. A randomized controlled trial indicates that given some encouragement, men are willing to transfer rights to their wives for cane blocks of significant quality and value. Increased cane ownership by women increased women's participation in cane management and marketing activities.
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Helping individuals to buy insurance coverage in developing countries, for instance by allowing them to buy insurance on credit, may induce more risky behavior. Using rich administrative data on auto-insurance market in Ghana, and a policy reform that led to sizable reduction in demand by disallowing individuals to buy insurance on credit, I provide non-parametric evidence for the existence of moral hazard and recover lower bounds on the costs it imposes in this market. The estimated cost of moral hazard reach 12% of firm profits. The results have important implications for the study of market inter-linkages, bundling and credit-constraints.
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Households in developing countries commonly engage in risk sharing to cope with shocks. Despite this, the residual risk they remain exposed to — often due to aggregate events such as droughts and floods — is considerable. To mitigate these risks, governments, NGOs and multilateral organizations have introduced index insurance. To appreciate its welfare implications, however, it is necessary to assess how insurance interacts with pre-existing risk sharing. We ask to what extent the demand for index insurance — as compared to standard indemnity insurance — depends on the level of pre-existing risk sharing. We contribute by developing a simple theoretical framework which shows that, relative to a state of autarky, risk sharing between agents increases demand for index insurance and decreases demand for indemnity insurance. In an artefactual field experiment with Ethiopian farmers who share risk in real life, we test and confirm these predictions.
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The bulk of the world's extreme poor work in subsistence agriculture. Diversification out of this activity is often seen as the sine qua non of economic development. We evaluate whether the roll‐out of a mainstay development intervention—microfinance—into poor, agricultural and largely unbanked populations in rural Uganda helps borrowers to diversify into non‐agricultural labour activities. The new microfinance product is targeted to women, and differs from existing sources of formal and informal credit in that it allows them to borrow larger amounts but has inflexible repayment dates and the use of funds is monitored. We find that the arrival of microfinance enables women to diversify out of agriculture and into service‐based activities such as small‐scale trading. This low‐level structural change, however, is not transformative in that it does not lead—at least after two years—to significant uplifts in earnings, consumption, savings, investment and overall wealth.
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Heat can cause substantial yield losses in crop production and climate change is increasing the risk of this kind of damage. Weather index insurance can help to reduce the financial losses resulting from heat exposure. This paper introduces crop-specific payout functions based on restricted cubic splines in heat index insurance. The use of restricted cubic splines is a cutting-edge method to reflect empirically estimated temperature effects on crop yields and to estimate temperature-related yield losses. The integration of these temperature effects in payout functions facilitates insurance design and allows hourly temperatures to be used as the underlying index. An empirical analysis is used to assess heat stress effects for a panel of East German winter wheat and winter rapeseed producers, to calibrate insurance contracts accordingly and simulate the resulting risk reducing capacities. We find that the insurance scheme introduced here leads to statistically and economically significant out-of-sample risk reducing capacities for farmers, i.e. risk premiums are reduced by up to approximately 20% at the median, in comparison to the uninsured status and at the actuarially fair premium. Moreover, we highlight that policy-makers can support the cost-efficient provision of market-based weather index insurance by fostering data collection and data provision.
Article
Geographers have interpreted the rise of weather insurance for small agricultural producers as emblematic of financialization’s inexorable march to capitalize the countryside. Yet this market has proved far less successful than advocates hoped or critics feared. Rather than a speculative tool for surplus extraction from smallholders or a mechanism for their financial subjectification, this article reinterprets weather insurance as an infrastructure of concessionary transfers from the development sector to make market-mediated mechanisms work. These transfers are emblematic of the new distributional terms struck between donors, states, and insurance capital as financial risk transfer is articulated with the extension of fragmentary safety nets. Economic field experiments with insurance have proliferated as venues in which the value of insurance is tested by both economists and experimenting subjects. Just as data from these trials have suggested some positive welfare impacts, they have also indicated target clients are unwilling or unable to pay full market price, thus performing a new justification for the perpetual presence of subsidies. Such transfers present opportunities for reinsurers to command rents through their control of large pools of capital and their interpretive authority over techniques for pricing risk under uncertainty. In a changing climate, reinsurers are poised to collect larger rents from donors’ and governments’ premium subsidies meant to decrease insurance costs for the vulnerable. These dynamics of rent cycling underscore the urgency of building more equitable, systematic risk-sharing infrastructures to replace the current fragmentary archipelagos of weather insurance.
Chapter
Some transaction costs act to reduce producer incentives to be concerned about the quality of their agricultural products. We present a simple model that demonstrates how those attenuating effects can be reduced and are affected by unobservable factors among both producers and purchasers, particularly in a low trust environment. One way to address quality concerns is through third-party certification schemes, which typically involve either unobservable attributes about the product or the production process. However, these schemes are expensive and actors need to reap higher returns from their activities to make them work. Evaluating the impacts of certification schemes is tricky because farmers self-select into participation, and the poorest farmers do not participate. Present evidence, however, suggests these schemes do have positive income effects for participating farmers.
Chapter
Agricultural value chains take on several different organizational forms, from being dominated completely by spot markets to being vertically integrated within a single company. We consider a conceptual model of factors leading to different value chain governance structures; then we adapt this model to African value chains by considering contextual factors, such as the abundance of smallholders and the fear that market power often resides with the trader in African value chains. We note that relational contracting plays a very important role in African value chains; transactions along value chains in Africa are typically based on implicit, self-enforcing contracts with little or no third-party enforcement. Transaction costs that lead to relational contracting simply reflect the economic and technological conditions at play.
Book
This book provides a thorough introduction to and examination of agricultural value chains in Sub-Saharan Africa. First, the authors introduce the economic theory of agri-food value chains and value chain governance, focusing on domestic and regional trade in (and consumption of) food crops in a low-income country context. In addition to mainstream and heterodox thinking about value chain development, the book pays attention to political economy considerations. The book also reviews the empirical evidence on value chain development and performance in Africa. It adopts multiple lenses to examine agricultural value chains, zooming out from the micro level (e.g., relational contracting in a context of market imperfections) to the meso level (e.g., distributional implications of various value chain interventions, inclusion of specific social groups) and the macro level (underlying income, population and urbanization trends, volumes and prices, etc.).Furthermore, this book places value chain development in the context of a process the authors refer to as structural transformation 2.0, which refers to a process where production factors (labor, land and capital) move from low-productivity agriculture to high-productivity agriculture. Finally, throughout the book the authors interpret the evidence in light of three important debates: (i) how competitive are rural factor and product markets, and what does this imply for distribution and innovation? (ii) what role do foreign investment and factor proportions play in the development of agri-food value chains in Africa? (iii) what complementary government policies can help facilitate a process of agricultural value chain transformation, towards high-productive activities and enhancing the capacity of value chains to generate employment opportunities and food security for a growing population. Alan de Brauw is a Senior Research Fellow at the International Food Policy Research Institute. He was previously a professor of economics at Williams College. He conducts much of his research using primary source data and has previously published over 50 articles in economics, agricultural economics, and nutrition journals. Erwin Bulte is professor of development economics at Wageningen University and Research. He has previously held positions at Oxford University, Cambridge University, Tilburg University and Utrecht University. He has published almost 150 papers in internationally refereed journals, and a previous Palgrave book on institutions and agrarian development in West Africa (with Paul Richards and Maarten Voors).
Chapter
Poor storage causes additional problems for smallholder farmers, as they are pressured to sell crops immediately after harvest. As a result, in Africa in many years prices for major grains fall right after harvest and peak just before the next one. Poor storage can also lead to post-harvest losses. Yet good post-harvest loss measurements are scarce, particularly for vegetables; since information on actual losses is poor, it is difficult to design cost-effective interventions to reduce them. With improved storage, farmers could reap returns to higher prices later in the season. More regional storage can also support warehouse receipts systems, which can be used both as collateral and to develop commodity exchanges. Yet again, transaction costs to using regional storage are high for smallholders.
Chapter
Smallholder farmers in Africa are poor and appear unproductive relative to larger farmers. But once one takes their environment into account, we argue they make rational production decisions given their multiple objectives under the multiple constraints they face. These constraints are shaped by transaction costs, which determine what smallholders can buy and sell. Transaction costs include not just transporting goods to market, but also costs of aggregation, dealing with risk, obtaining liquidity, and costs related to trust, market power, and even storage. The remainder of the book, then, provides historical and institutional reasons why African smallholders face high transaction costs. After explaining why some solutions will likely fail, the book concludes with what we consider promising areas for interventions to catalyze Structural Transformation 2.0 in Africa.
Chapter
Smallholder production in Africa tends to be both low yielding relative to the agronomic potential, and crops are of low or variable quality. These outcomes are largely a result of market conditions that smallholders face. Smallholders lack full property rights over land, and capital markets targeting smallholders are thin, so they may not be able to purchase enough inputs. Inputs are often costly, both because of relatively large distances inputs must travel, because farmers may lack information about the right amounts to use, and because they lack capital, reducing demand. And farmers may not trust inputs either, due to perceived counterfeiting or other risks. In selling on output markets, smallholders often face weak returns to quality due to imperfect competition. And even within households, these challenges can differ; women may face stricter constraints on their production than men do.
Chapter
Agricultural value chains evolve over time in a non-linear process but generally change from traditional to transitional and then more complex forms. The type of firms found in each value chain type differs, and farmers may produce for different types of value chains. The evolution process is driven by several factors, including changing relative prices, income and population growth, urbanization, and technological change. These factors create opportunities for new types of firms along agricultural value chains, and new forms of institutional arrangements, such as contract farming and value chain finance, can begin to replace more traditional institutions like relational contracting and informal moneylenders. We finally consider the role of imported food in shaping opportunities within agricultural value chains, depending both on local factors and transaction costs.
Chapter
African agricultural value chains have gradually evolved from informal exchange to more formalization in general, yet this process has not been linear in time. Policy changes between colonial and post-colonial regimes first shifted at least some smallholders into more formalized markets, and then back to selling surplus on spot markets. The colonial era can be characterized as extractive; institutions were developed to extract value from Africa and provide cheap food to Europe, particularly tropical commodities. Many post-colonial governments continued to implicitly tax agriculture through urban bias and pricing, tariff, or exchange rate policies until structural adjustment occurred in the 1990s. Since then, several factors have improved African agricultural performance, including an infusion of FDI and private sector investments and changes in agricultural policy in Europe improving African terms of trade.
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In this paper we provide a detailed description of the methodological steps involved in conducting a Service Design study in combination with Discrete Choice Experiments (DCEs). It complements the conceptual and epistemological argument developed for this methodological combination in Osborne et al. (2021, World Development, in review WD-19535). Service Design for the co-creative development of policy interventions in complex adaptive systems involves an iterative process of moving between the six methodological stages of (1) problem co-definition, (2) actor-centred mapping, (3) experience-based problem diagnosis, (4) rapid prototyping, (5) design and testing and (6) upscaling. We suggest using DCEs as a quantitative method that is contextually adaptable and comparatively fast and cheap to implement, as part of stage (6) design and testing. Whilst both methods can operate independently with their own strengths and limitations, we find their combination to add value to the processes and outcomes of each. We illustrate the general methodological approach with a step-by-step description of its application to Weather Index Insurance in eastern Uganda.
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The current study has motivated for assaying whether life insurance enrolment should be taken as a protection tool or a saving instrument. Reviewing literature hypotheses have been farmed and tested by gathering primary data through a survey from 120 sample respondents chosen by applying stratified random sampling. It has applied a cross-sectional study design and significant results have validated selective demographics, risks, returns, tax incentives and precautionary motives likely have influenced life insurance enrollments. Interestingly, instead of protection tools life insurance plans have been preferred as saving instrument. Existing insured customers may use the report for revisiting their risk appetites and quantum of sum assured to assess whether they have been under-insured and if so they could chalk out plans for taking purely term plans rather traditional plans and unit link insurance plans to replenish the deficiency.
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Weather shocks affect smallholder farmers and pastoralists in Sub-Saharan Africa unequally. Agricultural insurance has emerged as a safety net option to protect farmers’ welfare. However, in comparison to other regions, fewer African farmers and pastoralists have adopted agricultural insurance. This review synthesises broad recent literature on why insurance take-up has remained low and highlights six key themes, including: (1) product quality, (2) product design, (3) affordability, (4) information and education, (5) behavioural and sociocultural factors, and (6) the role of government in enabling markets. We shed light on how insurance uptake can be encouraged.
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Creating markets for formal insurance is a popular proposal to improve welfare among subsistence farmers in the developing world, but rates of adoption have been low. I hypothesized that this empirical puzzle may be caused by the substitution of informal sharing which crowds out formal insurance. I created an experiment in which individuals made private decisions but could also interact within a small group. In one risk-smoothing treatment, I introduced an option to informally transfer investment yields within a group. In the other risk-smoothing treatment, I also added an option to play a new game, which amounted to purchasing formal insurance. Using this experimental design among Kenyan adults, I found that formal insurance reduced the amount of informal group sharing and increases in past informal group sharing reduced the adoption of formal insurance. Thus, policies to increase formal insurance adoption must account for consumer substitution between both formal insurance and informal sharing.
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The suitability of insurance products often depends greatly on individual circumstances. This paper examines the challenges of heterogeneity in a relatively new product, weather‐indexed insurance. This index insurance product has been launched in over a dozen countries, with the goal of enabling households engaged in agricultural activity a means to manage risk. Using data from a large‐scale field experiment, we build and calibrate a model which accounts for household investment decisions, including the scope for self‐insurance via labor markets to (risky) wage work. Our results show that insurance is most valuable to households with reduced access to wage labor, or to those who face wages that are sensitive to rainfall risk. These findings have important implications for areas where index insurance is most effective.
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Rural economies in many developing countries are characterized by a lean season in the months preceding harvest, when farmers have depleted their cash and grain savings from the previous year. To identify the impacts of liquidity during the lean season, we offered subsidized loans in randomly selected villages in rural Zambia. Ninety-eight percent of households took up the loan. Loan eligibility led to increases in on-farm labor and agricultural output, driving up wages in local labor markets. Larger effects for poorer households suggest that liquidity constraints contribute to inequality in rural economies. (JEL O13, O15, O18, Q11, Q12, R23)
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This article studies strategic default on forward sale contracts in the international coffee market. To test for strategic default, we construct contract-specific measures of unanticipated changes in market conditions by comparing spot prices at maturity with the relevant futures prices at the contracting date. Unanticipated rises in market prices increase defaults on fixed-price contracts but not on price-indexed ones. We isolate strategic default by focusing on unanticipated rises at the time of delivery after production decisions are sunk and suppliers have been paid. Estimates suggest that roughly half of the observed defaults are strategic. We model how strategic default introduces a trade-off between insurance and counterparty risk: relative to indexed contracts, fixed-price contracts insure against price swings but create incentives to default when market conditions change. A model calibration suggests that the possibility of strategic default causes 15.8% average losses in output, significant dispersion in the marginal product of capital, and sizable negative externalities on supplying farmers.
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Abstract Bundling credit with insurance contracts is a common approach to increasing insurance take-up, especially in low income-environments. I document that this approach can induce adverse selection in insurance; thus, acting as an important source of inefficiency. JEL CODES: D82, G22, O12 KEYWORDS: Adverse Selection, Insurance, Credit, Bundling, Regulation
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We conduct a randomized controlled trial to examine the impacts of delayed premium payment on insurance uptake and the subsequent investment decisions among smallholder farmers in rural China. Our results show uptake among those with the delayed payment option is 10% higher than and three times as high as among those without the option. We also find a positive impact of delayed premium payment and insurance adoption on household investment in production, especially higher risk activities.
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Why do many households remain exposed to large exogenous sources of non-systematic income risk? We use 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. We find demand is significantly price-elastic, but that even if insurance were offered with payout ratios similar to US, widespread coverage would not be achieved. We then identify key non-price frictions that limit demand: liquidity constraints, particularly among poor households, lack of trust, and limited salience. We suggest potential improvements in contract design to mitigate these frictions.
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There is a vigorous debate on liberalization of the heavily regulated agricultural markets in India. A crucial institutional characteristic is the role of state-regulated brokers in wholesale markets. Relying on data from a unique survey in Uttarakhand, a state in North India, we find that regulations on margins are ineffective, since most brokers charge rates that significantly exceed the regulated ones. We also find that a majority of farmers self-select into long-term relationships with brokers. These relationships allow some of the farmers to interlink credit and insurance markets to the agricultural output market. This interlinkage does not, however, appear to be an instrument for farmer exploitation (since it does not lead to worse inputs, higher interest rates, or lower implicit output prices) but is seemingly an extra service provided by brokers to establish farmer loyalty and thereby ensure future supplies.
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Risk and time are intertwined. The present is known while the future is inherently risky. Discounted expected utility provides a simple, coherent struc-ture for analyzing decisions in intertemporal, uncertain environments. Critical to such analysis is the notion that certain and uncertain utility are functionally interchangeable. We document an important and robust violation of discounted expected utility, which is essentially a violation of this interchangeability. In pa-rameter estimations, certain utility is found to be almost linear while uncertain utility is found to be substantially more concave. These results have implications for discounted expected utility theory and decision theory in general. Applica-tions are made to dynamic inconsistency, the uncertainty effect, the estimation of risk preferences, and probability weighting.
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Many severe health risks in developing countries could be substantially reduced with access to appropriate preventive measures. However, the associated costs are often high enough to restrict access among poor households, and free provision through public health campaigns is often not financially feasible. We describe findings from the first large-scale cluster randomized controlled trial in a developing country context that evaluates the uptake of a health-protecting technology, insecticide-treated bednets (ITNs), through micro-consumer loans, as compared to free distribution and control conditions. Numerous studies have shown that widespread, regular use of ITNs is one the most effective preventive measures against malaria. However, ownership rates remain very low in most malarious areas, including our study areas in rural Orissa (India). Despite the un-subsidized price, 52 percent of sample households purchased at least one ITN, leading to 16 percent of individuals using a treated net the previous night, relative to only 2 percent in control areas where nets were not offered for sale. However, the increase fell significantly short of the 47 percent previous-night usage rate achieved with free distribution. Most strikingly, we find that neither micro-loans nor free distribution led to improvements in malaria and anemia prevalence, measured using blood tests. We examine and rule out several plausible explanations for this latter finding. We conjecture that insufficient ITN coverage is the most likely explanation, and discuss implications for public health policy.
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As firms switch from defined-benefit plans to defined-contribution plans, employees bear more responsibility for making decisions about how much to save. The employees who fail to join the plan or who participate at a very low level appear to be saving at less than the predicted life cycle savings rates. Behavioral explanations for this behavior stress bounded rationality and self-control and suggest that at least some of the low-saving households are making a mistake and would welcome aid in making decisions about their saving. In this paper, we propose such a prescriptive savings program, called Save More Tomorrow (hereafter, the SMarT program). The essence of the program is straightforward: people commit in advance to allocating a portion of their future salary increases toward retirement savings. We report evidence on the first three implementations of the SMarT program. Our key findings, from the first implementation, which has been in place for four annual raises, are as follows: (1) a high proportion (78 percent) of those offered the plan joined, (2) the vast majority of those enrolled in the SMarT plan (80 percent) remained in it through the fourth pay raise, and (3) the average saving rates for SMarT program participants increased from 3.5 percent to 13.6 percent over the course of 40 months. The results suggest that behavioral economics can be used to design effective prescriptive programs for important economic decisions.
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This article studies strategic default on forward sale contracts in the international coffee market. To test for strategic default, we construct contract-specific measures of unanticipated changes in market conditions by comparing spot prices at maturity with the relevant futures prices at the contracting date. Unanticipated rises in market prices increase defaults on fixed-price contracts but not on price-indexed ones. We isolate strategic default by focusing on unanticipated rises at the time of delivery after production decisions are sunk and suppliers have been paid. Estimates suggest that roughly half of the observed defaults are strategic. We model how strategic default introduces a trade-off between insurance and counterparty risk: relative to indexed contracts, fixed-price contracts insure against price swings but create incentives to default when market conditions change. A model calibration suggests that the possibility of strategic default causes 15.8% average losses in output, significant dispersion in the marginal product of capital, and sizable negative externalities on supplying farmers.
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We present the results of an experiment introducing commercial rainfall index insurance into drought‐prone farming cooperatives in Amhara Region, Ethiopia. We provided a market‐priced rainfall deficit insurance product through producer cooperatives and tested a number of potential ways to kick start private demand. Take up of the insurance at market prices is very low, between 0.5% and 3% across seasons. When we use a randomized experiment to distribute small free insurance contracts to farmers, 39% of subsidized individuals enroll but this fails to stimulate input use, yields, or income, nor does it enhance demand in subsequent seasons. A training and promotion on the product improves uptake and willingness to pay but also does not improve farming outcomes. We conclude with a case study of our efforts to interlink index insurance with credit for agricultural inputs.
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This paper studies alcohol consumption among low-income workers in India. In a 3-week field experiment, the majority of 229 cycle-rickshaw drivers were willing to forgo substantial monetary payments in order to set incentives for themselves to remain sober, thus exhibiting demand for commitment to sobriety. Randomly receiving sobriety incentives significantly reduced daytime drinking while leaving overall drinking unchanged. I find no evidence of higher daytime sobriety significantly changing labor supply, productivity, or earnings. In contrast, increasing sobriety raised savings by 50 percent, an effect that does not appear to be solely explained by changes in income net of alcohol expenditures.
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Despite extensive evidence that preferences are often time-inconsistent, there is only scarce evidence of willingness to pay for commitment. Infrequent payments for frequently provided goods and services are a common feature of many markets and they may naturally provide commitment to save for lumpy expenses. Multiple experiments in the Kenyan dairy sector show that: (i) farmers are willing to incur sizable costs to receive infrequent payments as a commitment device, (ii) poor contract enforcement, however, limits competition among buyers in the supply of infrequent payments. We then present a model of demand and supply of infrequent payments and test its additional predictions.
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This paper develops an experimental approach to measure competition among intermediaries in agricultural markets, based on the random allocation of subsidies to traders. We show that, in individual-level randomizations with competitive spillovers, treatment-control differences in prices can inform an intuitive test of the degree of differentiation among firms. In the context of the Sierra Leone cocoa industry, traders compete by providing farmers credit, as well as through prices. Even when accounting for both the price and the credit margin, differentiation among traders is low. By combining the experimental results with quasi-experimental estimates of the pass-through rate, we then estimate market size the effective number of traders competing for farmers' supply and we find it to be substantially larger than the village. These results are consistent with a view of competitive agricultural markets.
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Weather is a key source of income risk, especially in emerging market economies. This paper uses a randomized controlled trial involving Indian farmers to study how an innovative rainfall insurance product affects production decisions. We find that insurance provision induces farmers to invest more in higher-return but rainfall-sensitive cash crops, particularly among educated farmers. This shift in behavior occurs ex ante, when realized monsoon rainfall is still uncertain. Our results suggest that financial innovation can mitigate the real effects of uninsured production risk. Received December 26, 2014; editorial decision June 14, 2016 by Editor Philip Strahan.
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This article provides a review of recent research on agricultural insurance (AI) in developing countries. Agricultural producers face a variety of significant risks; historically, only government-subsidized products have achieved widespread adoption. A recent contractual innovation, which links insurance payouts to realized weather rather than farmer indemnity, has spurred substantial research in the past decade. This review begins by describing the experience in developed economies and then turns to developing countries, covering the following topics: farmers’ adoption of AI, how AI affects their decision to invest in risky assets, and the extent to which AI helps farmers smooth income and consumption. We conclude with suggestions for future research and practice related to AI in developing countries. Expected final online publication date for the Annual Review of Economics Volume 9 is August 2, 2017. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
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Many consumers do not adopt products with health and wellbeing benefits apparently far greater than their costs. A sales offer combining a free trial, time payments, and the option of returning the product can overcome barriers such as liquidity constraints and poor information about benefits and usability. We tested this sales offer (and alternatives) in an experiment with a fuel-efficient charcoal stove in urban Uganda and a fuel-efficient wood stove in rural Uganda. Consistent with the importance of these barriers, this offer dramatically increased uptake—in urban Kampala, from 4% to 46%, and in rural Mbarara, from 5% to 57%. (JEL: I12, O12, O33, Q56)
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Self-control problems change the logic of agency theory by partly aligning the interests of the firm and worker: both now value contracts that elicit future effort. Findings from a year-long field experiment with full-time data entry workers support this idea. First, workers increase output by voluntarily choosing dominated contracts (which penalize low output but give no additional rewards for high output). Second, effort increases closer to (randomly assigned) paydays. Third, the contract and payday effects are strongly correlated within workers, and this correlation grows with experience. We suggest that workplace features such as high-powered incentives or effort monitoring may provide self-control benefits.
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This paper provides evidence on the importance of reputation in the context of the Kenyan rose export sector. A model of reputation and relational contracting is developed and tested. A seller's reputation is defined by buyer's beliefs about seller's reliability. We show that (i) due to lack of enforcement, the volume of trade is constrained by the value of the relationship; (ii) the value of the relationship increases with the age of the relationship; and (iii) during an exogenous negative supply shock deliveries are an inverted-U shaped function of relationship's age. Models exclusively focusing on enforcement or insurance considerations cannot account for the evidence.
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Traditional models of insurance choice are predicated on fully informed and rational consumers protecting themselves from exposure to financial risk. In practice, choosing an insurance plan is a complicated decision often made without full information. In this paper we combine new administrative data on health plan choices and claims with unique survey data on consumer information to identify risk preferences, information frictions, and hassle costs. Our additional friction measures are important predictors of choices and meaningfully impact risk preference estimates. We study the implications of counterfactual insurance allocations to illustrate the importance of distinguishing between these micro-foundations for welfare analysis.
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This paper studies regulated health insurance markets known as exchanges, motivated by the increasingly important role they play in both public and private insurance provision. We develop a framework that combines data on health outcomes and insurance plan choices for a population of insured individuals with a model of a competitive insurance exchange to predict outcomes under different exchange designs. We apply this framework to examine the effects of regulations that govern insurers' ability to use health status information in pricing. We investigate the welfare implications of these regulations with an emphasis on two potential sources of inefficiency: (i) adverse selection and (ii) premium reclassification risk. We find substantial adverse selection leading to full unraveling of our simulated exchange, even when age can be priced. While the welfare cost of adverse selection is substantial when health status cannot be priced, that of reclassification risk is five times larger when insurers can price based on some health status information. We investigate several extensions including (i) contract design regulation, (ii) self-insurance through saving and borrowing, and (iii) insurer risk adjustment transfers.
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In this paper we draw on recent progress in the theory of (1) property rights, (2) agency, and (3) finance to develop a theory of ownership structure for the firm.1 In addition to tying together elements of the theory of each of these three areas, our analysis casts new light on and has implications for a variety of issues in the professional and popular literature, such as the definition of the firm, the “separation of ownership and control,” the “social responsibility” of business, the definition of a “corporate objective function,” the determination of an optimal capital structure, the specification of the content of credit agreements, the theory of organizations, and the supply side of the completeness-of-markets problem.
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Incentivized experiments are commonly used to estimate marginal rates of intertemporal substitution (MRS) in the lab and in the field in order to make inferences about individual time preferences. This paper considers an integrated model of behavior in which individuals are subject to financial shocks and credit constraints, and take those into account when making experimental choices. The model shows that measured MRS depends on the individual’s effective interest rate which is equal to the relative marginal utility of current and future consumption. Experimental responses should therefore be correlated with other variables that describe the subject’s financial situation, like savings and shocks to income and consumption. We test the model using a new a panel data set from Mali and find evidence for such effects. Our results imply that the relationship between experimentally elicited MRS and time preferences is not straightforward. However, measured MRS can be useful in determining the importance of different types of financial shocks to the household.
Article
Rational demand for index insurance products is shown to be fundamentally different to that for indemnity insurance products due to the presence of basis risk. In particular, optimal demand is zero for infinitely risk-averse individuals, and is nonmonotonic in risk aversion, wealth, and price. For a given belief, upper bounds are derived for the optimal demand from risk-averse and decreasing absolute risk-averse decision makers. A simple ratio for monitoring basis risk is presented and applied to explain the low level of demand for consumer hedging instruments as a rational response to deadweight costs and basis risk.
Article
The investment decisions of small-scale farmers in developing countries are conditioned by their financial environment. Binding credit market constraints and incomplete insurance can limit investment in activities with high expected profits. We conducted several experiments in northern Ghana in which farmers were randomly assigned to receive cash grants, grants of or opportunities to purchase rainfall index insurance, or a combination of the two. Demand for index insurance is strong, and insurance leads to significantly larger agricultural investment and riskier production choices in agriculture. The binding constraint to farmer investment is uninsured risk: when provided with insurance against the primary catastrophic risk they face, farmers are able to find resources to increase expenditure on their farms. Demand for insurance in subsequent years is strongly increasing with the farmer’s own receipt of insurance payouts, with the receipt of payouts by others in the farmer’s social network and with recent poor rain in the village. Both investment patterns and the demand for index insurance are consistent with the presence of important basis risk associated with the index insurance, imperfect trust that promised payouts will be delivered and overweighting recent events.
Article
Agricultural index insurance indemnifies a farmer against losses based on an index that is correlated with, but not identical to, her or his individual outcomes. In practice, the level of correlation may be modest, exposing insured farmers to residual, basis risk. In this article, we study the impact of basis risk on the demand for index insurance under risk and compound risk aversion. We simulate the impact of basis risk on the demand for index insurance by Malian cotton farmers using data from field experiments that reveal the distributions of risk and compound risk aversion. The analysis shows that compound risk aversion depresses demand for a conventional index insurance contract some 13 percentage points below what would be predicted based on risk aversion alone. We then analyze an innovative multiscale index insurance contract that reduces basis risk relative to conventional, single‐scale index insurance contract. Simulations indicate that demand for this multiscale contract would be some 40% higher than the demand for an equivalently priced conventional contract in the population of Malian cotton farmers. Finally, we report and discuss the actual uptake of a multiscale contract introduced in Mali.
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Microfinance institutions have started to bundle their basic loans with other financial services, such as health insurance. Using a randomized control trial in Karnataka, India, we evaluate the impact on loan renewal from mandating the purchase of actuarially-fair health insurance covering hospitalization and maternity expenses. Bundling loans with insurance led to a 16 percentage points (23 percent) increase in drop-out from microfinance, as many clients preferred to give up microfinance than pay higher interest rates and receive insurance. In a Pyrrhic victory, the total absence of demand for health insurance led to there being no adverse selection in insurance enrollment.
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We study the dynamics of microinsurance demand by risk-averse agents who can borrow and lend subject to a liquidity constraint, and also perceive a risk of insurer default. Liquidity constraints and perceived insurer default both reduce the demand for insurance, possibly leading to nonparticipation. We also evaluate an alternative insurance design that allows agents to delay premium payment until the end of the insured period when income is realized and indemnities are paid. We show this alternative design increases insurance take-up by relaxing the liquidity constraint and ameliorating concerns about insurer default. We also investigate the value of delayed premium payment, and the importance of the associated problem of reneging if the insured event does not occur, under a range of conditions.
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The poor often behave in less capable ways, which can further perpetuate poverty. We hypothesize that poverty directly impedes cognitive function and present two studies that test this hypothesis. First, we experimentally induced thoughts about finances and found that this reduces cognitive performance among poor but not in well-off participants. Second, we examined the cognitive function of farmers over the planting cycle. We found that the same farmer shows diminished cognitive performance before harvest, when poor, as compared with after harvest, when rich. This cannot be explained by differences in time available, nutrition, or work effort. Nor can it be explained with stress: Although farmers do show more stress before harvest, that does not account for diminished cognitive performance. Instead, it appears that poverty itself reduces cognitive capacity. We suggest that this is because poverty-related concerns consume mental resources, leaving less for other tasks. These data provide a previously unexamined perspective and help explain a spectrum of behaviors among the poor. We discuss some implications for poverty policy.
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Using data from a randomized experiment in rural China, this paper studies the influence of social networks on the decision to adopt a new weather insurance product and the mechanisms through which social networks operate. We provided financial education to a random subset of farmers and found a large social network effect on take-up: for untreated farmers, having an additional friend receiving financial education raised take-up by almost half as much as obtaining financial education directly, a spillover effect equivalent to offering a 15% reduction in the average insurance premium. By varying the information available to individuals about their peers’ take-up decisions and using randomized default options, we show that the positive social network effect is not driven by the diffusion of information on purchase decisions, but instead by the diffusion of knowledge about insurance. We also find that social network effects are larger in villages where households are more strongly connected, and when people who are the first to receive financial education are more central in the social network.
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Reaching-for-yield - investors’ propensity to buy riskier assets in order to achieve higher yields - is believed to be an important factor contributing to the credit cycle. This paper presents a detailed study of this phenomenon in the corporate bond market. We show that insurance companies, the largest institutional holders of corporate bonds, reach for yield in choosing their investments. Consistent with lower rated bonds bearing higher capital requirement, insurance firms’ prefer to hold higher rated bonds. However, conditional on credit ratings, insurance portfolios are systematically biased toward higher yield, higher CDS bonds. Reaching-for-yield exists both in the primary and the secondary market, and is robust to a series of bond and issuer controls, including bond liquidity and duration, and issuer fixed effects. This behavior is related to the business cycle, being most pronounced during economic expansions. It is also more pronounced for firms with poor corporate governance and for which regulatory capital requirement is more binding. A comparison of the ex-post performance of bonds acquired by insurance companies shows no outperformance, but higher systematic risk and volatility.
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Experimental tests of dynamically inconsistent time preferences have largely relied on choices over time-dated monetary rewards. Several recent studies have failed to find the standard patterns of present bias. However, such monetary studies contain often-discussed confounds. In this paper, we sidestep these confounds and investigate choices over consumption (real effort) in a longitudinal experiment. We pair this effort study with a companion monetary discounting study. We confirm very limited time inconsistency in monetary choices. However, subjects show considerably more present bias in effort. Furthermore, present bias in the allocation of work has predictive power for demand of a meaningfully binding commitment device. Therefore our findings validate a key implication of models of dynamic inconsistency, with corresponding policy implications.
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To investigate the effectiveness of scaling-up existing bednet distribution campaigns, a randomised controlled trial with 516 farming households in Katete District, a rural area with highly endemic malaria in Zambia's Eastern Province, was evaluated. In the trial, selected farmers were assigned to bednet programmes that allowed them to obtain additional bednets for free or at subsidised prices through agricultural loan programmes. On average, 2.4 nets were distributed in the free distribution group and 0.9 in the net loan group. The marginal health impact of additional nets appears large, reducing the odds of self-reported all-cause morbidity by 40–42% and the odds of self-reported confirmed malaria by 53–60%.
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This paper explores the relationship between capital and index insurance market development using a theoretical model in which small farm households have the option to either (i) adopt a capital-intensive technology that is risky but high yielding, or (ii) to self-insure by adotping a traditional low input technology. We show that neither market is likely to develop in isolation from the other, and that uptake of improved technology will be low absent efforts to link capital and insurance. The failure of index insurance markets to independently develop is not per se due to the existence of basis risk or to its expense as self-insurance strategies are similarly characterized by basis risk and are costly to the household as they are reduce mean incomes. However, we show that the interlinkage of credit and index insurance contracts can allow both markets to develop because the interlinked contract can stochastically dominate self-insurance. The analysis also shows that the way interlinkage will work depends fundamentally on the nature of the agricultural credit market and the degree to which lenders are able to demand and seize collateral in the event of loan default. This interplay between collateral and the nature of credit-insurance interlinkage has direct and important implications for the design of programs to simultanteously boost small farm productivity and deepen rural financial markets.
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Households risk management, that is, households' insurance against adverse shocks to income, assets, and financing needs, is limited and often completely ab-sent, in particular for poor households. We explain the limited extent and absence of risk management in an intertemporal model in which households have access to complete markets subject to collateral constraints and in which the financing needs for consumption and durable goods purchases override the risk management concerns. The absence of many markets for claims which allow household risk man-agement is consistent with our model and should not be considered a puzzle. Risk management of the price risk of durable goods moreover depends on the sign of the hedging demand and on whether the household owns or rents the durable goods.
Article
Unpredictable rainfall is an important risk for agricultural activity, and farmers in developing countries often receive incomplete insurance from informal risk-sharing networks. We study the demand for, and effects of, offering formal index-based rainfall insurance through a randomized experiment in an environment where the informal risk sharing network can be readily identified and richly characterized: sub-castes in rural India. A model allowing for both idiosyncratic and aggregate risk shows that informal networks lower the demand for formal insurance only if the network indemnifies against aggregate risk, but not if its primary role is to insure against farmer-specific losses. When formal insurance carries basis risk (mismatches between payouts and actual losses due to the remote location of the rainfall gauge), informal risk sharing that covers idiosyncratic losses enhance the benefits of index insurance. Formal index insurance enables households to take more risk even in the presence of informal insurance. We find substantial empirical support of these nuanced predictions of the model by conducting the experiment (randomizing both index insurance offers, and the locations of rainfall gauges) on castes for whom we have a rich history of group responsiveness to household and aggregate rainfall shocks.
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We study the demand for household water connections in urban Morocco, and the effect of such connections on household welfare. In the northern city of Tangiers, among homeowners without a private connection to the city's water grid, a random subset was offered a simplified procedure to purchase a household connection on credit (at a zero percent interest rate). Take-up was high, at 69%. Because all households in our sample had access to the water grid through free public taps (often located fairly close to their homes), household connections did not lead to any improvement in the quality of the water households consumed; and despite significant increase in the quantity of water consumed, we find no change in the incidence of waterborne illnesses. Nevertheless, we find that households are willing to pay a substantial amount of money to have a private tap at home. Being connected generates important time gains, which are used for leisure and social activities, rather than productive activities. Because water is often a source of tension between households, household connections improve social integration and reduce conflict. Overall, within 6 months, self-reported well-being improved substantially among households in the treatment group, despite the financial cost of the connection. Our results suggest that facilitating access to credit for households to finance lump sum quality-of-life investments can significantly increase welfare, even if those investments do not result in income or health gains.
Article
Both financing and risk management involve promises to pay which need to be collateralized resulting in a financing vs. risk management trade-off. We study this trade-off in a dynamic model of commodity price risk management and show that risk management is limited and that more financially constrained firms hedge less or not at all. We document that these predictions are consistent with the evidence using panel data for fuel price risk management by airlines. More constrained airlines hedge less both in the cross section and within airlines over time. Risk management drops substantially as airlines approach distress and recovers only slowly after airlines enter distress.
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Collateral constraints imply that financing and risk management are fundamentally linked. The opportunity cost of engaging in risk management and conserving debt capacity to hedge future financing needs is forgone current investment, and is higher for more productive and less well-capitalized firms. More constrained firms engage in less risk management and may exhaust their debt capacity and abstain from risk management, consistent with empirical evidence and in contrast to received theory. When cash flows are low, such firms may be unable to seize investment opportunities and be forced to downsize. Consequently, capital may be less productively deployed in downturns.
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Farmers face a particular set of risks that complicate the decision to borrow. We use a randomized experiment to investigate (1) the role of crop-price risk in reducing demand for credit among farmers and (2) how risk mitigation changes farmers’ investment decisions. In Ghana, we offer farmers loans with an indemnity component that forgives 50 percent of the loan if crop prices drop below a threshold price. A control group is offered a standard loan product at the same interest rate. Loan uptake is high among all farmers and the indemnity component has little impact on uptake or other outcomes of interest.
Article
Randomized controlled trials are increasingly used to evaluate policies. How can we make these experiments as useful as possible for policy purposes? We argue greater use should be made of experiments that identify the behavioral mechanisms that are central to clearly specified policy questions, what we call "mechanism experiments." These types of experiments can be of great policy value even if the intervention that is tested (or its setting) does not correspond exactly to any realistic policy option.
Article
Government intervention in insurance markets is ubiquitous and the theoretical basis for such intervention, based on classic work from the 1970s, has been the problem of adverse selection. Over the last decade, empirical work on selection in insurance markets has gained considerable momentum. This research finds that adverse selection exists in some insurance markets but not in others. And it has uncovered examples of markets that exhibit "advantageous selection"—a phenomenon not considered by the original theory, and one that has different consequences for equilibrium insurance allocation and optimal public policy than the classical case of adverse selection. Advantageous selection arises when the individuals who are willing to pay the most for insurance are those who are the most risk averse (and so have the lowest expected cost). Indeed, it is natural to think that in many instances individuals who value insurance more may also take action to lower their expected costs: drive more carefully, invest in preventive health care, and so on. Researchers have taken steps toward estimating the welfare consequences of detected selection and of potential public policy interventions. In this essay, we present a graphical framework for analyzing both theoretical and empirical work on selection in insurance markets. This graphical approach provides both a useful and intuitive depiction of the basic theory of selection and its implications for welfare and public policy, as well as a lens through which one can understand the ideas and limitations of existing empirical work on this topic.
Article
It is often argued that cost-sharing-charging a subsidized, positive price-for a health product is necessary to avoid wasting resources on those who will not use or do not need the product. We explore this argument through a field experiment in Kenya, in which we randomized the price at which prenatal clinics could sell long-lasting antimalarial insecticide-treated bed nets (ITNs) to pregnant women. We find no evidence that cost-sharing reduces wastage on those who will not use the product: women who received free ITNs are not less likely to use them than those who paid subsidized positive prices. We also find no evidence that cost-sharing induces selection of women who need the net more: those who pay higher prices appear no sicker than the average prenatal client in the area in terms of measured anemia (an important indicator of malaria). Cost-sharing does, however, considerably dampen demand. We find that uptake drops by sixty percentage points when the price of ITNs increases from zero to $0.60 (i.e., from 100% to 90% subsidy), a price still $0.15 below the price at which ITNs are currently sold to pregnant women in Kenya. We combine our estimates in a cost-effectiveness analysis of the impact of ITN prices on child mortality that incorporates both private and social returns to ITN usage. Overall, our results suggest that free distribution of ITNs could save many more lives than cost-sharing programs have achieved so far, and, given the large positive externality associated with widespread usage of ITNs, would likely do so at a lesser cost per life saved. (c) 2010 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..
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Take-up of an innovative rainfall insurance policy offered to smallholder farmers in rural India decreases with basis risk between insurance payouts and income fluctuations, increases with household wealth, and decreases with binding credit constraints. These results are consistent with the predictions of a simple neoclassical model with borrowing constraints. Other patterns are less consistent with the benchmark model. For example, participation in village networks and measures of familiarity with the insurance vendor are strongly correlated with insurance take-up decisions, and risk-averse households are less, not more, likely to purchase insurance. These results may reflect household uncertainty about the product, given their limited experience with it.
Article
Does production risk suppress the demand for credit? We implemented a randomized field experiment to ask whether provision of insurance against a major source of production risk induces farmers to take out loans to adopt a new crop technology. The study sample was composed of roughly 800 maize and groundnut farmers in Malawi, where by far the dominant source of production risk is the level of rainfall. We randomly selected half of the farmers to be offered credit to purchase high-yielding hybrid maize and groundnut seeds for planting in the November 2006 crop season. The other half of farmers were offered a similar credit package, but were also required to purchase (at actuarially fair rates) a weather insurance policy that partially or fully forgave the loan in the event of poor rainfall. Surprisingly, take-up was lower by 13 percentage points among farmers offered insurance with the loan. Take-up was 33.0% for farmers who were offered the uninsured loan. There is suggestive evidence that reduced take-up of the insured loan was due to farmers already having implicit insurance from the limited liability clause in the loan contract: insured loan take-up was positively correlated with farmer education, income, and wealth, which may proxy for the individual's default costs. By contrast, take-up of the uninsured loan was uncorrelated with these farmer characteristics.
Article
There is an emerging consensus among macro-economists that differences in technology across countries account for the major differences in per-capita GDP and the wages of workers with similar skills across countries. Accounting for differences in technology levels across countries thus can go a long way towards understanding global inequality. One mechanism by which poorer countries can catch up with richer countries is through technological diffusion, the adoption by low-income countries of the advanced technologies produced in high-income countries. In this survey, we examine recent micro studies that focus on understanding the adoption process. If technological diffusion is a major channel by which poor countries can develop, it must be the case that technology adoption is incomplete or the inputs associated with the technologies are under-utilized in poor, or slow-growing economies. Thus, obtaining a better understanding of the constraints on adoption is useful in understanding a major component of growth.
Article
We propose a guaranteed renewability (GR) insurance in which a sequence of premiums would enable insurers to break even and would be chosen by both low- and high-risk buyers, whether or not they had suffered a loss. The premium schedule would continually decline over time, as the insurer collects more information to determine who the low-risk buyers are. The highest premiums are charged initially to protect the insurer if low-risk individuals leave for the spot market. The concluding portion of the article discusses the limitations of a GR policy in the health and environmental liability area, the most serious being instability in estimates of underlying loss trends. Peer Reviewed http://deepblue.lib.umich.edu/bitstream/2027.42/47916/1/11166_2005_Article_BF01083557.pdf
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Several recent studies have suggested that empirical rejections of the permanent income/life cycle model may be due to the existence of liquidity constraints. This paper tests the permanent income hypothesis against the alternative hypothesis that consumers optimize subject to a well-specified sequence of borrowing constraints. Implications for consumption in the presence of borrowing constraints are derived and then tested using time-series/cross-section data on families from the Panel Study of Income Dynamics. The results generally support the hypothesis that an inability to borrow against future labor income affects the consumption of a significant portion of the population. Copyright 1989 by University of Chicago Press.