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Risk, informal institutions, and index insurance

Francis Annan and Bikramaditya Datta

Journal of Environmental Economics and Management, 2022, vol. 113, issue C

Abstract: The question of how informal institutions interact with formal markets is a central economic question, particularly in developing countries. We analyze this issue for the demand of an innovative weather insurance product. Specifically, when does informal risk-sharing act as barrier or support to the take-up of index-based insurance? The presence of an individual in a risk-sharing arrangement reduces her risk aversion, termed “Effective Risk Aversion”— a sufficient statistic for index decision making. Our analysis establishes that such reduction in risk aversion can lead to either reduced or increased take up of index insurance. These results provide alternative explanations for two empirical puzzles: unexpectedly low takeup for index insurance and demand being particularly low for the most risk averse. From a policy perspective, our results highlight how the combination of premium subsidies and informal networks might promote take-up and how this might eventually facilitate better protection against weather risks.

Keywords: Basis risk; Climate insurance; Risk aversion; Informal institutions (search for similar items in EconPapers)
JEL-codes: D14 D81 G22 O12 Q54 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.jeem.2022.102635

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Journal of Environmental Economics and Management is currently edited by M.A. Cole, A. Lange, D.J. Phaneuf, D. Popp, M.J. Roberts, M.D. Smith, C. Timmins, Q. Weninger and A.J. Yates

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