Index Based Insurance in Developing Countries: Rational Neglect?

Daniel Würtenberger

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

Abstract: Microinsurance adoption in developing countries is low, despite its potential to foster economic growth. Recent research is not able to explain the low demand within the neoclassical framework. I contribute to this stream of research by proposing rational as well as boundedly rational explanations for the low attractiveness of microinsurance within a stochastic framework. More precisely, I analyze weather index insurance. My model makes separate predictions for close farmers, whose location is near a weather station, and distant farmers. Results show that the latter ask for less than 50% insurance coverage even under perfect rationality. I extend the model by integrating incorrect beliefs. I can show that a lack of trust reduces insurance demand most for close farmers, while a lack of knowledge about the insurance negatively affects the demand of distant farmers. Moreover, subsidies are more effective for close than for distant farmers.

Keywords: index insurance; basis risk; microinsurance; developing countries; understanding of insurance products; trust in insurer (search for similar items in EconPapers)
JEL-codes: D91 G22 O13 O16 Q12 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-agr, nep-dev, nep-ias, nep-ore and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:206408

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