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Time versus State in Insurance: Experimental Evidence from Contract Farming in Kenya

Lorenzo Casaburi and Jack Willis

American Economic Review, 2018, vol. 108, issue 12, 3778-3813

Abstract: The gains from insurance arise from the transfer of income across states. Yet, by requiring that the premium be paid upfront, standard insurance products also transfer income across time. We show that this intertemporal transfer can help explain low insurance demand, especially among the poor, and in a randomized control trial in Kenya we test a crop insurance product which removes it. The product is interlinked with a contract farming scheme: as with other inputs, the buyer of the crop offers the insurance and deducts the premium from farmer revenues at harvest time. The take-up rate for pay-at-harvest insurance is 72 percent, compared to 5 percent for the standard pay-up-front contract, and the difference is largest among poorer farmers. Additional experiments and outcomes provide evidence on the role of liquidity constraints, present bias, and counterparty risk, and find that enabling farmers to commit to pay the premium just one month later increases demand by 21 percentage points.

JEL-codes: G22 I32 O13 O16 Q12 Q14 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/aer.20171526
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