Can Insurance Payouts Prevent a Poverty Trap? Evidence from Randomized Experiments in Northern Kenya

Yuma Noritomo () and Kazushi Takahashi
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Yuma Noritomo: Graduate School of Economics, The University of Tokyo

No 19-07, GRIPS Discussion Papers from National Graduate Institute for Policy Studies

Abstract: Index-based insurance can have welfare-enhancing effects through two pathways: by mitigating weather-related shocks through payouts and by inducing policyholders to take greater yet more profitable risks. Most studies fail to distinguish between these two. Thus, we know little about which effects dominate and their long-term welfare implications. Using a random distribution of discount coupons and drought events that trigger payouts as exogenous variations, this study aims to identify both the ex ante risk-management and ex post payout effects of index insurance in a pastoral-dominant society of northern Kenya, where the presence of asset-based poverty traps, represented by bifurcated herd-size dynamics, has been established in the literature. We find the following: (1) Both risk-management and payout effects contribute to reducing the probability of distress sales of livestock; (2) payout effects also lead to a reduced slaughter of livestock; (3) while payout effects remain robust in a subsample of poorer households below the poverty trap threshold, riskmanagement effects do not. Overall, our results suggest that insurance payouts assist people in escaping from poverty traps more effectively than do behavioural changes accompanied by insurance purchases.

Pages: 32 pages
Date: 2019-06
New Economics Papers: this item is included in nep-dev and nep-mfd
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Journal Article: Can Insurance Payouts Prevent a Poverty Trap? Evidence from Randomised Experiments in Northern Kenya (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ngi:dpaper:19-07

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