Consumption smoothing: institutions, incentives and economic outcomes : evidence from framed field experiments and panel data

Abstract

Incomes of farmers and agricultural workers experience seasonal fluctuations. Due to limited access to formal insurance institutions, rural households rely on informal insurance institutions for instance tied labour and transfers from family and friends, to smooth consumption. Formal and informal insurance institutions offer differing incentives to households. This thesis investigates incentives pertaining to insurance institutions, their indirect and aggregate level outcomes. The overall objective of this thesis is to: identify incentive compatible solutions to smoothing consumption, examine the effect of intrinsic incentives on supply of effort, and analyse the aggregate level effects of microfinance institutions. Specifically this thesis assess (1) whether interacting savings institutions with rural labour markets improves incentives for labour tying, (2) how supply of self-image motivated effort can be more optimally elicited, (3) how insurance institutions can be aligned to elicit higher demand for formal insurance products, and (4) how microfinance institutions affect income inequality. This thesis makes use of framed field experiments to elicit incentive compatible preferences. A contextualised ultimatum game is applied to test rural labour market incentives and outcomes, and a contextualised risk game is applied to test moral hazard incentives under formal and informal insurance in risky production. This thesis also uses panel data to assess the effect of subgroups of microfinance institutions on income inequality. Main finding include (1) complementary savings institutions do not result into higher wages for labour tying, (2) self-signalling workers increase effort following higher and fairer wages, (3) lack of experience with formal insurance products impends their uptake, and (4) microfinance institutions do not contribute to enhancing the income status of the bottom poor. This thesis presumes that policy interventions to improve market outcomes of the poor should not focus on introducing complementary institutions, but rather on supporting cooperation and information programmes to enhance bargaining position of the poor.