Barriers to Household Risk Management: Evidence from India

Shawn Cole
Xavier Gine
Jeremy Tobacman
Petia Topalova
Robert M. Townsend
James Vickery
Publication Type: 
Papers
Publication Article File: 
Journal Name: 
American Economic Journal: Applied Economics
Journal Volume: 
5
Journal Number: 
1
Pages: 
140-35
Publication Year: 
2013

Financial engineering offers the potential to significantly reduce consumption fluctuations faced by individuals, households, and firms. Yet much of this promise remains unrealized. In this paper, we study the adoption of an innovative rainfall insurance product designed to compensate low-income Indian farmers in case of deficient rainfall during the primary monsoon season. We first document relatively low levels of adoption of this new risk management technology: only 5-10% of households purchase insurance, even though rainfall variability is overwhelmingly cited by households as the most important risk they face. We then conduct a series of randomized field experiments to test theoretical predictions of why adoption may be low. Insurance purchase is sensitive to price, with an estimated extensive price elasticity of demand between -0.66 and -0.88. Credit constraints, identified through the provision of random liquidity shocks, are a key barrier to participation, a result also consistent with household self-reports. Several experiments find an important role for trust in insurance participation. We find mixed evidence that subtle psychological manipulations affect purchase, and no evidence that modest amounts of financial education changes participation decisions. Based on our experimental results, we suggest preliminary lessons for improving the design of household risk management contracts.

Region: 
South and Central Asia
Country: 
India
Topic: 
Insurance
Topic: 
Financial Institutions
Topic: 
Randomized Evaluation
Topic: 
Experiments
Topic: 
Agriculture
Topic: 
Risk
Topic: 
Consumption