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on Microfinance |
| By: | Casaburi, Lorenzo; Willis, Jack |
| 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 for pay-at-harvest insurance is 72%, compared to 5% for the standard pay-upfront contract, and the difference is largest among poorer farmers. Additional experiments and outcomes provide evidence on the role of liquidity constraints, present bias, and counterparty risk, and find that enabling farmers to commit to pay the premium just one month later increases demand by 21 percentage points. |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12896&r=mfd |
| By: | Casaburi, Lorenzo (University of Zurich); Macchiavello, Rocco (London School of Economics) |
| Abstract: | Despite extensive evidence that preferences are often time-inconsistent, there is only scarce field evidence of willingness to pay for commitment. Infrequent payments may naturally provide commitment for lumpy expenses. Multiple experiments in the Kenyan dairy sector show that: i) farmers are willing to incur sizable costs to receive infrequent payments and demand for commitment is an important driver of this preference; ii) poor contract enforcement, however, limits competition among buyers in the supply of infrequent payments; iii) in such a market, the effects of price increases on sales depend on both buyer credibility and payment frequency. Infrequent payments are common in many goods and labor markets, but they may not be competitively offered when contracts are not enforceable. |
| Keywords: | Saving Constraints; Commitment; Agricultural Markets; Contract Enforcement; Interlinked Transactions. JEL Classification: O12, O16, D90, Q13. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:cge:wacage:367&r=mfd |
| By: | Douadia Bougherara; Laurent Piet |
| Abstract: | A growing number of studies in finance and economics seek to explain insurance choices using the assumptions advanced by behavioral economics. One recent example in agricultural economics is the use of cumulative prospect theory (CPT) to explain farmer choices regarding crop insurance coverage levels (Babcock, 2015). We build upon this framework by deriving willingness to pay (WTP) for insurance programs under alternative assumptions, thus extending the model to incorporate farmer decisions regarding whether or not to purchase insurance. Our contribution is twofold. First, we study the sensitivity of farmer WTP for crop insurance to the inclusion of CPT parameters. We find that loss aversion and probability distortion increase WTP for insurance while risk aversion decreases it. Probability distortion in losses plays a particularly important role. Second, we study the impact of yield distribution skewness on farmer WTP assuming CPT preferences. We find that WTP decreases when the distribution of yields moves from negatively- to positively-skewed and that the combined effect of probability weighting in losses and skewness has a large negative impact on farmer WTP for crop insurance. |
| Keywords: | crop insurance, cumulative prospect theory, premium subsidy; skewness |
| JEL: | D81 Q10 Q12 Q18 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:lam:wpceem:18-08&r=mfd |