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


Casaburi, Lorenzo; Willis, Jack (2016). Time vs. state in insurance: experimental evidence from contract farming in Kenya. UBS Center Working Paper Series 18, University of Zurich.

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.

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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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
03 Faculty of Economics > UBS International Center of Economics in Society
Working Paper Series > UBS Center Working Paper Series
Dewey Decimal Classification:330 Economics
JEL Classification:D81, O13, O55
Uncontrolled Keywords:Insurance, income transfer, development economics, contract farming
Language:English
Date:December 2016
Deposited On:01 Feb 2017 16:43
Last Modified:03 Jun 2017 11:48
Series Name:UBS Center Working Paper Series
Number of Pages:80
ISSN:2296-2778
Official URL:http://www.ubscenter.uzh.ch/assets/workingpapers/WP18_Time_vs_State_in_Insurance.pdf
Related URLs:http://www.ubscenter.uzh.ch/index.php/de/publications/workingpapers

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