Barriers to household risk management: Evidence from India

Arbeitspapier

Financial engineering offers the potential to significantly reduce the consumption fluctuations faced by individuals, households, and firms. Yet much of this potential remains unfulfilled. This paper studies the adoption of an innovative rainfall insurance product designed to compensate low-income Indian farmers in the event of insufficient rainfall during the primary monsoon season. We first document relatively low adoption of this new risk management product: Only 5-10 percent of households purchase the insurance, even though they overwhelmingly cite rainfall variability as their most significant source of risk. We then conduct a series of randomized field experiments to test theories of why product adoption is so low. Insurance purchase is sensitive to price, with an estimated extensive price elasticity of demand ranging between -.66 and -0.88. Credit constraints, identified through the provision of random liquidity shocks, are a key barrier to participation, a result also consistent with household self-reports. Several experiments find that trust plays an important role in the decision to purchase insurance. We find mixed evidence that subtle psychological manipulations affect purchases and no evidence that modest attempts at financial education change households' decisions to participate. Based on our experimental results, we suggest preliminary lessons for improving the design of household risk management contracts.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Staff Report ; No. 373

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Household Saving; Personal Finance ; Portfolio Choice; Investment Decisions ; Insurance; Insurance Companies; Actuarial Studies ; Criteria for Decision-Making under Risk and Uncertainty
• Thema: Insurance ; economic development ; consumer finance ; India ; liquidity constraints ; trust ; Landwirtschaftlicher Familienbetrieb ; Risikomanagement ; Elementarschadenversicherung ; Verhaltensökonomik ; Indien

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Cole, Shawn ; Giné, Xavier ; Tobacman, Jeremy ; Topalova, Petia ; Townsend, Robert ; Vickery, James
• Ereignis: Veröffentlichung
• (wer): Federal Reserve Bank of New York
• (wo): New York, NY
• (wann): 2009

Weitere Informationen

• Handle: http://hdl.handle.net/10419/60964
• Letzte Aktualisierung: 10.03.2025, 11:43 MEZ