Barriers to Household Risk Management: Evidence from India

Abstract

Why do many households remain exposed to large exogenous sources of non-systematic income risk? We use a series of randomized field experiments in rural India to test the importance of price and non-price factors in the adoption of an innovative rainfall insurance product. Demand is significantly price sensitive, but widespread take-up would not be achieved even if the product offered a payout ratio comparable to U.S. insurance contracts. We present evidence suggesting that lack of trust, liquidity constraints and limited salience are significant non-price frictions that constrain demand. We suggest contract design improvements to mitigate these frictions.

Financial Illiteracy and Pension Contributions: A Field Experiment on Compound Interest in China

“…Financial products, such as pensions, can potentially help rural households smooth consumption, increase investment in human capital, and reduce poverty and vulnerability amongst the elderly. 10 The existing literature suggests that the use of these products is not widespread and provides evidence for a number of explanations (Gine et al 2008;Cole et al 2011). Yet the neglect of compound interest remains less explored as a possible explanation for the low utilization of savings products.…”

“…The details are discussed in Section 3. 8 Some studies find small or no effects of financial education on individual decisions (Duflo and Saez 2003;Cole et al 2011;Carter et al 2008), while others find positive and significant effects (Bayer et al One possible mechanism is our focus here: there is evidence that individuals tend to linearize exponential functions when assessing them intuitively (Eisenstein and Hoch 2005;Stango and Zinman 2009;McKenzie and Liersch 2011). 9 For savings, such an error implies a systematic tendency to underestimate interest accrued in the future, in which case individuals will underestimate the value of saving.…”

“…19 These questions were adopted from Banks et al (2010), Lusardi and Mitchell (2006), Eisenstein and Hoch (2005), and Cole et al (2011). 20 There is a concern that households do not like to report their investments and wealth.…”

How Can Safety Nets Contribute to Economic Growth?

“…Similarly, Cai et al (2010) observe that farmers in China raised more pigs when provided access to insurance. They also note that trust appears to be a limiting factor in take up, a conclusion also supported by field trials in India (Cole et al 2013).…”

Weather index insurance for managing drought risk in smallholder agriculture: lessons and policy implications for sub-Saharan Africa

“…There has been much enthusiasm for, and investigations of, the potential benefits of weather index insurance for agricultural risk transfer and mitigation in low income economies (Skees et al 1999;Turvey 2001;Mahul 2001;Hess and Syroka 2005;World Bank 2005Barnett et al 2008;Carter 2009;IFAD and WFP 2010;Suarez and Linnerooth-Bayer 2010;Shee and Turvey 2012;Cole et al 2013). Underlying this interest are the widespread welfare losses that arise from large scale covariate weather risks, particularly in low income countries where market imperfections limit effective risk transfer instruments.…”