Abstract
This paper estimates how experimentally-manipulated experiences with a novel financial product, rainfall index insurance, affect subsequent insurance demand. Using a seven-year panel, we develop three main findings. First, recent experience matters for demand, consistent with overinference from small samples. Second, spillovers also matter, in the sense that the recent payout experience of village co-residents affects insurance demand about as much as one's own recent payout experience. Third, the spillover effect decays as time passes while the effect of one's own experience does not. We discuss implications of this analysis for commercial sustainability of this complicated but promising risk management technology.
Highlights
Cole, Shawn A., Daniel Stein, and Jeremy Tobacman
Consumers must correctly estimate the probability distribution over a wide range of states of the world and imagine alternative coping mechanisms which may be available in unfamiliar scenarios. These difficulties are likely to be even more pronounced with novel financial products, such as rainfall index insurance, whose payouts depend on readings at local rainfall stations rather than consumers’ actual losses
This paper examines the development of a new insurance market in detail, using a 7-year panel of rainfall insurance purchase decisions made by rural farming households in Gujarat, India
Summary
A Gujarat-based NGO, the Self-Employed Women’s Association (SEWA) marketed rainfall insurance to residents of 60 villages over a seven-year period from 2006-2013. A SEWA marketing team visited households in our sample each year in April-May to offer rainfall insurance policies. Each year households in the study were randomly assigned marketing packages, which induced exogenous variation in insurance coverage. We restrict analysis in this paper to the balanced panel of households who remain available to receive both marketing and survey visits in each year after they are added to the project. This results in a main sample of 989 households and 5,659 household-years in which the current and once-lagged insurance coverage decision are observed. Summary statistics for all variables are reported in the online appendix
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