Financial Instrument Bundling Under Multiple Market Failures: A Household Risk Layering Approach

Rozana Himaz, Vanina Farber and Saut Sagal

No 2026-01, CSAE Working Paper Series from Centre for the Study of African Economies, University of Oxford

Abstract: Households in disaster-prone environments face multiple market failures-credit constraints, coordination breakdowns and behavioural biases that undermine the effectiveness of standalone financial instruments such as insurance. This paper develops a theoretical model showing that welfare-optimal household disaster risk management requires bundling financial instruments across the ex-ante and ex-post disaster risk management cycle covering prevention, mitigation, coping and recovery, layering tools by hazard probability and severity. We show that bundling dominates single-instrument approaches when it simultaneously relaxes distinct market frictions and is complemented by coordination effectiveness. Numerical simulations illustrate hazard-specific optimal portfolios for frequent floods and rare catastrophic earthquakes. We use two programs from Indonesia to illustrate how strategic bundling can be applied in practice in programme design. The framework provides testable predictions and guidance for designing integrated household financial protection systems in developing countries.

Keywords: Risk Layering; Bundling; Market Failures; Disaster Risk Management; Developing Countries; Household Finance (search for similar items in EconPapers)
JEL-codes: D81 D91 G22 H84 O16 Q54 (search for similar items in EconPapers)
Date: 2026
New Economics Papers: this item is included in nep-mfd
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