Risk, Informal Institutions, and Index Insurance

18 Pages Posted: 7 Dec 2017 Last revised: 24 Jun 2021

See all articles by Francis Annan

Francis Annan

Georgia State University

Bikramaditya Datta

Indian Institute of Technology Kanpur

Date Written: April 15, 2019

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 take- up 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

Suggested Citation

Annan, Francis and Datta, Bikramaditya, Risk, Informal Institutions, and Index Insurance (April 15, 2019). Available at SSRN: https://ssrn.com/abstract=3081599 or http://dx.doi.org/10.2139/ssrn.3081599

Francis Annan (Contact Author)

Georgia State University ( email )

35 Broad St NW
Atlanta, GA 30309
United States

Bikramaditya Datta

Indian Institute of Technology Kanpur ( email )

IIT Kanpur
kalyanpur
Kanpur, 208016
India

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