|Title||Liquidity constraints, informal institutions, and the adoption of weather insurance: A randomized controlled Trial in Ethiopia|
|Author(s)||Belissa, Temesgen; Bulte, Erwin; Cecchi, Francesco; Gangopadhyay, Shubhashis; Lensink, Robert|
|Source||Journal of Development Economics 140 (2019). - ISSN 0304-3878 - p. 269 - 278.|
|Publication type||Refereed Article in a scientific journal|
|Availibility||Full text available from 2022-09-01|
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.