Risk preference or financial literacy? Behavioural experiment on index insurance demand

Awel Y. and Azomahou T.T.
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Azomahou T.T.: UNU-MERIT

No 2015-005, MERIT Working Papers from United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT)

Abstract: We use unique cross-sectional household data from Ethiopia to investigate the effect of risk preference, financial literacy and other socio-economic characteristics on demand for index insurance. We measure risk preference based on survey experiments using lottery choice game with real monetary prizes. First, we find no evidence of risk aversion on demand for index insurance. Second, we find positive impact of financial literacy on purchasing insurance. Third, relaxing liquidity constraint enhance the take-up of insurance. Finally, demographic and village characteristics have little role in the decision to uptake insurance. These findings have implications on product design and marketing strategies. The product design should focus on ways that better account for liquidity constraint of the household. Interventions that strengthen efforts in provision of financial literacy programmes are worthy. Our results are robust to changes in specification and estimation method.

Keywords: Risk aversion; financial literacy; weather index insurance; lottery choice game; Ethiopia (search for similar items in EconPapers)
JEL-codes: D14 D81 G2 G22 O16 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-agr, nep-exp, nep-mfd and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:unm:unumer:2015005

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