Abstract
AbstractWe estimate the causal effects of index insurance coverage on subjective well‐being among livestock herders in southern Ethiopia. By exploiting the randomized distribution of discount coupons and information treatments to instrument for the purchase of index‐based livestock insurance, and three rounds of panel data, we separately identify ex ante welfare gains from insurance that reduces risk exposure and ex post buyer's remorse effects that may arise after the resolution of uncertainty. We find that current insurance coverage generates subjective well‐being gains that are significantly higher than the buyer's remorse effect of an insurance policy that lapsed without paying out. Given the positive correlation in insurance purchase propensity over time, failure to control for potential buyer's remorse effects can bias downward estimates of welfare gains from current insurance coverage.
Highlights
Uninsured risk exposure in low-income rural communities is widely believed to cause serious welfare losses and to distort behaviors, potentially even resulting in poverty traps (Rosenzweig & Binswanger, 1993; Morduch, 1994; Carter & Barrett, 2006; Dercon & Christiaensen, 2011; Barrett & Carter, 2013; Santos & Barrett, 2016)
In addition to the randomized discount coupon and information treatments in column 1, we include a broad range of household characteristics, wealth measures, index-based livestock insurance (IBLI) knowledge, expectations of livestock loss, membership in iqub, and survey round fixed effects
The parameter estimates of both models show that randomized treatments had positive effects on IBLI uptake and, can serve as suitable instruments
Summary
Uninsured risk exposure in low-income rural communities is widely believed to cause serious welfare losses and to distort behaviors, potentially even resulting in poverty traps (Rosenzweig & Binswanger, 1993; Morduch, 1994; Carter & Barrett, 2006; Dercon & Christiaensen, 2011; Barrett & Carter, 2013; Santos & Barrett, 2016). Index insurance attempts to mitigate adverse selection, moral hazard and high transaction cost concerns by writing contracts not on policyholders’ realized losses but, instead, on a lowcost, observable indicator – the ‘index’ – believed to be strongly correlated with actual losses. When the index does not closely track policyholders’ actual losses, the imperfect correlation creates “basis risk” that can result in uninsured losses despite the purchase of insurance. This can lead to uninsured catastrophic loss despite a premium payment; as a result, index insurance will not stochastically dominate remaining uninsured (Jensen et al, 2016)
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