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Demand for Weather Index Insurance among Smallholder Farmers under Prospect Theory

Soye Shin, Nicholas Magnan, Conner Mullally () and Sarah Janzen

Journal of Economic Behavior & Organization, 2022, vol. 202, issue C, 82-104

Abstract: Index insurance offers an innovative risk management solution for uninsured agricultural weather risk. We investigate the theoretical relationship between prospect theory risk preferences and characteristics of index insurance. We pair these theoretical findings with data from a lab-in-the-field experiment in Kenya. Empirically, we find that insurance demand is decreasing in loss aversion, and the negative marginal effect of loss aversion on insurance demand increases with basis risk and the insurance premium. Our theoretical and empirical results combined illustrate the importance of considering both risk and loss aversion, as well as basis risk, in understanding index insurance decisions.

Keywords: Basis risk; index insurance; loss aversion; prospect theory; risk aversion; D81; G22; Q14 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.jebo.2022.07.027

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

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Handle: RePEc:eee:jeborg:v:202:y:2022:i:c:p:82-104