Welfare Impacts of Index Insurance in the Presence of a Poverty Trap

Sommarat Chantarat, Andrew G. Mude, Christopher Barrett and Calum Turvey

No 24, PIER Discussion Papers from Puey Ungphakorn Institute for Economic Research

Abstract: This paper evaluates the welfare impacts of an index-based livestock insurance designed to compensate for satellite-based predicted livestock mortality in northern Kenya, where previous work has established the presence of poverty traps. We simulate household wealth dynamics based on rich panel and experimental data. The bifurcated livestock dynamics associated with the poverty trap gives rise to insurance valuation that is highly nonlinear in herd size. Estimated willingness to pay among vulnerable groups who most need insurance is, on average, lower than commercially viable rates. Targeted premium subsidization nonetheless appears to offer more cost-effective poverty reduction than need-based direct transfers.

Keywords: index insurance; asset risk; nonlinear growth; poverty traps; safety net; risk preference elicitation; Africa; Kenya (search for similar items in EconPapers)
JEL-codes: D14 D81 D91 I32 O12 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2016-04
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Journal Article: Welfare Impacts of Index Insurance in the Presence of a Poverty Trap (2017)
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