Moral Hazard Incentives under Formal Insurance and Informal Insurance: Evidence from a Framed Field Experiment

Aisha Nanyiti and Haki Pamuk

Journal of African Economies, 2025, vol. 34, issue 1, 80-115

Abstract: This paper explores moral hazard incentives associated with formal and informal insurance. We develop a theoretical model of risky effort that incorporates formal insurance and informal risk sharing, and test model predictions through a real-effort experiment with smallholder farmers in rural Uganda. Consistent with the theory, we find evidence of moral hazard under informal insurance. We, however, do not find evidence of moral hazard under formal insurance in our experiment. Experiencing a bad outcome, however, makes the risk in production more salient to farmers, and they increase their insurance coverage. These results suggest there may be some space for expanding indemnity-based insurance to smallholder farmers through awareness programmes.

Keywords: formal insurance; informal insurance; moral hazard; JEL classification: D1; D15; D81 (search for similar items in EconPapers)
Date: 2025
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