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Liquidity constraints, informal institutions, and the adoption of weather insurance: A randomized controlled Trial in Ethiopia

Journal article
Authors T. Belissa
E. Bulte
F. Cecchi
Shubhashis Gangopadhyay
R. Lensink
Published in Journal of Development Economics
Volume 140
Pages 269-278
ISSN 0304-3878
Publication year 2019
Published at Department of Business Administration
Pages 269-278
Language en
Links dx.doi.org/10.1016/j.jdeveco.2019.0...
Subject categories Economics

Abstract

We report the results of a drought insurance experiment in Ethiopia, and examine whether uptake of index-based insurance is enhanced if we allow farmers to pay after harvest (addressing a liquidity constraint). We also test to what extent uptake can be enhanced by promoting insurance via informal risk-sharing institutions (Iddirs), to reduce trust and information problems. The delayed payment insurance product increases uptake substantially when compared to standard insurance, from 8% to 24%, and leveraging informal institutions results in even greater uptake (43%). We also find suggestive evidence that the delayed premium product is indeed better at targeting the liquidity constrained. However, default rates associated with delayed payments are relatively high and concentrated in a small number of Iddirs – potentially compromising the economic viability of the novel product. We discuss how default rates can be reduced. © 2019 Elsevier B.V.

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