Climate change and index insurance demand: Evidence from a framed field experiment in Tanzania

John P. Dougherty, Jon Einar Flatnes, Richard A. Gallenstein, Mario J. Miranda and Abdoul G. Sam

Journal of Economic Behavior & Organization, 2020, vol. 175, issue C, 155-184

Abstract: Index insurance has been touted as part of an adaptation strategy to mitigate climate risks among smallholder farmers. However, in the face of increasing drought probabilities, demand for index insurance may decrease compared to a scenario with no climate change, if farmers learn slowly or place considerable weight on prior beliefs. Using data from a framed field experiment in Tanzania, we estimate a structural learning model based on a Bayesian change-point inference method and separately identify the effect of learning, expectations, recency bias, and ambiguity on insurance demand. Furthermore, by simulating the supply-side of the insurance market under a set of plausible assumptions, we show that climate change results in reduced uptake rates in most cases, although demand may increase if the severity of climate change is sufficiently low. Overall, our results provide an alternative explanation for the puzzle of low index insurance demand.

Keywords: Index insurance; Climate change; Learning; Ambiguity aversion; Recency bias; Framed field experiment (search for similar items in EconPapers)
JEL-codes: D81 D83 O12 O16 Q14 Q54 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:175:y:2020:i:c:p:155-184

DOI: 10.1016/j.jebo.2020.04.016

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