Only the Rich Need Apply? A Dynamic Model of Index-Based Insurance Choice

Katie Farrin

No 124679, 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington from Agricultural and Applied Economics Association

Abstract: I present a dynamic expected utility model to explain farmers’ borrowing decisions and observed low demand for index-based agricultural insurance. Results indicate that, in the absence of insurance, only low- and medium-wealth households access credit for farming and consumption. Once insurance contracts become available, however, cases exist in which borrowing initially declines with wealth until a critical wealth level is reached, after which wealthier households take out loans in order to purchase insurance. Implications of simulations suggest that index-based products may not be tailored for the ultra-poor, who must borrow the maximum amount simply to meet consumption needs. As such, researchers piloting index-based insurance programs must seriously consider the effects of liquidity constraints on contract uptake.

Keywords: Risk; and; Uncertainty (search for similar items in EconPapers)
Pages: 29
Date: 2012
New Economics Papers: this item is included in nep-ias and nep-mfd
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea12:124679

DOI: 10.22004/ag.econ.124679

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