Insurance Contracts when Individuals “Greatly Value” Certainty: Results from a Field Experiment in Burkina Faso

Elena Serfilippi, Michael Carter and Catherine Guirkinger ()

No 25026, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In discussing the paradoxical violation of expected utility theory that now bears his name, Maurice Allais noted that individuals tend to “greatly value” payoffs that are certain. Allais' observation would seem to imply that people will undervalue insurance relative to the predictions of expected utility theory because as conventionally constructed, insurance offers an uncertain benefit in exchange for a certain cost that certainty-loving individuals will overvalue. Pursuing this logic, we implemented insurance games with cotton farmers in Burkina Faso. On average, farmer willingness to pay for insurance increases significantly when a premium rebate framing is used to render both costs and benefits of insurance uncertain. We show that the impact of the rebate frame on the willingness to pay for insurance is driven by those farmers who exhibit a well-defined discontinuous preference for certainty, a concept that we adapt from the u-v model of utility and measure with a novel behavioral experiment. Given that the potential impacts of insurance for small scale farmers are high, and yet demand for conventionally framed contracts is often low, the insights from this paper suggest welfare-enhancing ways of designing insurance for low-income farmers.

JEL-codes: D03 Q12 (search for similar items in EconPapers)
Date: 2018-09
New Economics Papers: this item is included in nep-agr, nep-exp, nep-ias, nep-mfd and nep-upt
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References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as Elena Serfilippi & Michael Carter & Catherine Guirkinger, 2019. "Insurance contracts when individuals “greatly value” certainty: Results from a field experiment in Burkina Faso," Journal of Economic Behavior & Organization, .

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