Insurance contracts when individuals “greatly value” certainty: Results from a field experiment in Burkina Faso

Elena Serfilippi, Michael Carter and Catherine Guirkinger

Journal of Economic Behavior & Organization, 2020, vol. 180, issue C, 731-743

Abstract: In discussing the paradoxical violation of expected utility theory that bears his name, Maurice Allais noted that people tend to “greatly value” certainty. Allais’ observation implies that people will undervalue insurance relative to the predictions of expected utility theory because, as conventionally constructed, insurance offers an uncertain benefit in exchange for a certain cost. Pursuing this logic, we implemented insurance games with cotton farmers in Burkina Faso. On average, farmer willingness to pay for insurance increases significantly when a premium rebate framing is used to render both costs and benefits of insurance uncertain. We show that the impact of the rebate frame on the willingness to pay for insurance is driven by those farmers who exhibit a well-defined discontinuous preference for certainty, a concept that we adapt from the u−v model of utility and measure with a novel behavioral experiment. Given that the potential impacts of insurance for small scale farmers are high, and yet demand for conventionally framed contracts is often low, the insights from this paper suggest welfare-enhancing ways of designing insurance for low-income farmers.

Keywords: Index insurance; Risk and uncertainty; Discontinuity of preferences; Field experiments (search for similar items in EconPapers)
JEL-codes: D03 Q12 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167268119302379
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:180:y:2020:i:c:p:731-743

DOI: 10.1016/j.jebo.2019.07.017

Access Statistics for this article

Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

More articles in Journal of Economic Behavior & Organization from Elsevier
Bibliographic data for series maintained by Catherine Liu ().