The Crowding-Out Effect of Formal Insurance on Informal Risk Sharing PDF Download
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Author: Wanchuan Lin
Publisher:
ISBN:
Category :
Languages : en
Pages : 65
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Book Description
This paper investigates the crowding-out effect of formal insurance on informal risk-sharing arrangements via theory and laboratory experiment. Our model and simulation predict that the crowding out of private transfers is often more than one-for-one and will reduce the total risk coverage. Furthermore, the existence of a moderate degree of altruism exaggerates the crowding-out effect, especially when there is an ex-ante income inequality. These predictions are mostly supported by the laboratory experiment, except that the crowding-out effect is not more than one-for-one, and hence the total risk coverage is not significantly reduced by formal insurance.
Author: Wanchuan Lin
Publisher:
ISBN:
Category :
Languages : en
Pages : 65
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Book Description
This paper investigates the crowding-out effect of formal insurance on informal risk-sharing arrangements via theory and laboratory experiment. Our model and simulation predict that the crowding out of private transfers is often more than one-for-one and will reduce the total risk coverage. Furthermore, the existence of a moderate degree of altruism exaggerates the crowding-out effect, especially when there is an ex-ante income inequality. These predictions are mostly supported by the laboratory experiment, except that the crowding-out effect is not more than one-for-one, and hence the total risk coverage is not significantly reduced by formal insurance.
Author:
Publisher:
ISBN:
Category :
Languages : en
Pages : 46
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Book Description
Author: Steve Boucher
Publisher:
ISBN:
Category :
Languages : en
Pages : 36
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Book Description
Moral hazard and adverse selection impede the development of formal crop insurance markets in developing countries. Besides, the risk mitigation provided by informal risk-sharing arrangements is restricted by their inability to protect against covariate shocks. In this context, index-based insurance is seen as a promising scheme as it is immune to moral hazard and adverse selection and may offer effective protection against covariate shocks. It would thus seem that the two institutions are ideal complements. Unfortunately, this intuition ignores the potential effects on incentives and behavior generated by the interaction between both schemes. This paper explores this interaction in a model with moral hazard and shows that the formal contract may crowd out informal risk-sharing if it is offered to individuals. Second, we find that both risk-taking and welfare may be reduced by the introduction of index insurance if the premium is set too high. If the formal insurance is offered to the group instead of the individual, the impact on moral hazard is internalized and welfare increases.
Author: Wanchuan Lin
Publisher:
ISBN:
Category :
Languages : en
Pages : 57
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Book Description
The literature has mixed results on how formal insurance affects informal risk sharing. Whether such effect is motivated extrinsically or intrinsically also remains unclear. We design a lab experiment in which formal insurance is introduced and removed unexpected and the insurance purchase decisions are either voluntary or forced. We find, quite surprisingly, that informal risk sharing is significantly improved after the removal of formal insurance, primarily for subjects making asymmetric insurance take-up decisions voluntarily. Investigating the dynamics suggests that it is those who take the insurance acting first to share more risk for their partners. We propose a model based on a particular feature of social preferences, guilt aversion, to explain our findings.
Author: Dirk Krueger
Publisher:
ISBN:
Category : Insurance
Languages : en
Pages : 38
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Book Description
"Can public insurance through redistributive income taxation improve the allocation of risk in an economy in which private risk sharing is limited? The answer depends crucially on the fundamental friction that limits private risk sharing in the first place. If risk sharing is incomplete because some insurance markets are missing for model-exogenous reasons (as in Bewley, 1986 and Aiyagari, 1994) publicly provided risk sharing via a tax system generally improves on the allocation of risk. If instead private insurance markets exist but their use is limited by the absence of complete enforcement (as in Kehoe and Levine, 1993 and Kocherlakota, 1996) then the provision of public insurance can crowd out private insurance to such an extent that total consumption insurance is reduced. By reducing income risk the tax system increases the value of being excluded from private insurance markets and hence weakens the enforcement mechanism of these contracts. In this paper we theoretically characterize and numerically compute equilibria in an economy with limited enforcement and a continuum of agents facing realistic income risk and tax systems with various degrees of risk reduction (progressivity). We find that the crowding-out effect of public insurance on private insurance in the limited enforcement model can be quantitatively important, as is the positive insurance effect of taxation in the Bewley model"--National Bureau of Economic Research web site.
Author: Chang Xu (Ph. D. in agricultural economics)
Publisher:
ISBN:
Category : Agriculture
Languages : en
Pages : 152
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Book Description
In Chapter 2, I empirically test the theoretical prediction presented in Chapter 1 that access to indemnity payments from index insurance will increase participation in informal risk sharing. I utilize data provided by the International Livestock Research Institute (ILRI). ILRI piloted Index-Based Livestock Insurance (IBLI) program with pastoralists in Kenya. A propensity score matching model is used to compare the tendency to give and receive informal transfers (cash and in-kind) between pastoralists who have received index insurance indemnity and those who have not. Results suggest a complementary relationship between access to index insurance indemnity and informal risk sharing participation, implying a crowding-in effect of the formal insurance on informal insurance. The results are consistent with the theoretical results presented in Chapter 1. The effectiveness of index insurance relies on the ability of the index to accurately predict the outcome of target. Thus, in Chapter 3, I study how to incorporate the Normalized Differenced Vegetation Index (NDVI) to provide better predictions for soybean yields in ten major producing states in the United States. To account for geographical heterogeneity, I use the Geographically Weighted Regression (GWR) model and the Flexible Fourier Transform (FFT) model. Regression results from GWR and FFT show that the responses of crop yields to NDVI during the growing season vary across geographical locations. The out-of-sample cross-validation forecasts indicate that accounting for geographical heterogeneity improves forecasts by reducing forecast errors.
Author: Ashok Kundu
Publisher: Palmview Publishing
ISBN: 8193291212
Category : Business & Economics
Languages : en
Pages : 205
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Book Description
The linkage between poverty, livelihood, and the environment is always multifaceted and often complex. The degradation of the environment has been plunging millions of people into poverty. The last century witnessed rapid progress in the application of science and technology, which resulted in improvement in livelihood, reduction in poverty, enhanced life expectancy and huge growth in consumption which in turn created pressure on the environment. Thus, the planet's capacity to sustain is eroding with degrading agricultural land, shrinking forests, diminishing supply of clean water and other related issues. Apart from food and water, clean and affordable access to energy is one key issue to a decent livelihood. The tradeoffs that policymakers are facing nowadays are rapid reduction in poverty and improving livelihood without harming the environment. These draw our focus to address environmental issues that matter to the livelihood of the poor which are critical for poverty reduction. Strengthening the link between poverty, livelihood, and the environment can promote sustainable development outcomes. The book is a collection of articles on comprehensive research, case studies, empirical and theoretical papers on these issues. The chapters of the book attempted to analyze the links and identify approaches that can promote positive outcomes. The contributors here tried to highlight a number of key challenges that need to be addressed in the process of policy formulation and government investment programmes. It may serve as an important resource for academics, researchers, professionals, students and policy-makers.
Author: Oliver Fiala
Publisher: Springer
ISBN: 3319539043
Category : Business & Economics
Languages : en
Pages : 200
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Book Description
This study investigates the complex link between natural disasters, individual behaviour – in the form of an individual’s risk-taking propensity and level of trust – and the demand for microinsurance. Developing countries are particularly vulnerable to the impacts of natural hazards and climate change as they affect their development processes and set back poverty reduction efforts. Using a unique data set for rural Cambodia based on a survey, experimental games and a discrete choice experiment, the study highlights the importance of perceptions, expectations and psychological factors in decision-making processes with substantial consequences for long-term economic perspectives and poverty alleviation.
Author: Harold Alderman
Publisher: World Bank Publications
ISBN: 0821370375
Category : Social Science
Languages : en
Pages : 48
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Book Description
Uninsured risk had far-reaching consequences for rural growth as well as poverty reduction. A range of informal mechanisms to insure rural households against the impact of shocks, but they are a modest component of a risk layering strategy for well-off households and even less protective for low-income households. Formal insurance mechanisms have inherent market imperfections. State interventions to address these limitations have proven costly and generally are targeted poorly. Recent developments in microfinance as well as in insurance marketing have opened new possibilities for household risk reduction. Index insurance, such as weather indexing, addresses other inherent problems in insurance by using an indicator that is not affected by individual behaviour and may address monitoring costs and moral hazard. A number of innovations using index insurance are being tried currently in diverse settings ranging from India to Mongolia to Malawi. Marketing costs may limit the provision of such insurance to small farmers, but even in such cases microfinance institutes may serve as market intermediaries. Moreover, state and submational governments can use insurance to achieve countercyclical funding programs. In this vein, municipal governments in Mexico have used insurance to finance disaster contingency while the World Food Program has insured a portion of its emergency assistance to Ethiopia. Humanitarian organizations and NGOs may also seek insurance in this manner.
Author: World Institute for Development Economics Research
Publisher: Oxford University Press
ISBN: 0199276838
Category : Business & Economics
Languages : en
Pages : 484
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Book Description
Poor people in developing countries are often affected by droughts, floods, illness, crop failure, job loss, and economic downturns. Much of their energy goes into coping with these shocks and into day-to-day survival. While insurance and credit markets, combined with widespread social security, provide an important cushion against poverty in rich countries, the need for immediate survival may lock the poor into persistent poverty in developing countries.The poor in developing countries do have informal mechanisms to cope with risk and misfortune. These are based on income diversification, risk avoidance, self-insurance by saving together with family, and community-based mutual assistance. Nevertheless, the scope of these mechanisms remains limited. Repeated individual-specific shocks such as illness or pests, or covariate risks associated with drought, flood, or recession, undermine the ability of individuals and their families to cope withrisk.We now know much more about vulnerability to risk and how poor people cope. Even more importantly, we have learned much about the large long-term consequences of these risks, which condemns many to persistent poverty and excludes them from economic growth. But there is much that can be done. The micro-level studies that underpin this book offer new insights on how effective public action could be more effective in protecting the vulnerable against persistent poverty. Policy should focus onproviding a comprehensive menu of ex-ante and post-crisis protection mechanisms, including new forms of insurance, savings, safety nets, and the means to strengthen the poor's asset base. Local communities have a big role to play: public funds should not be used to replace indigenous community-basedsupport networks; rather they should be used to build on the strengths of these networks to ensure broader and more effective protection.With numerous thematic chapters and case studies of both best practice and of failure, from a mix of low-income and middle-income countries across the developing world, this book evaluates alternatives in widening insurance and protection provision, and makes an important contribution to the topical field of insurance and risk.
