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Demand for Weather Index Insurance among Smallholder Farmers under Prospect Theory

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  • Shin, Soye
  • Magnan, Nicholas
  • Mullally, Conner
  • Janzen, Sarah

Abstract

Index insurance offers an innovative risk management solution for uninsured agricultural weather risk. We investigate the theoretical relationship between prospect theory risk preferences and characteristics of index insurance. We pair these theoretical findings with data from a lab-in-the-field experiment in Kenya. Empirically, we find that insurance demand is decreasing in loss aversion, and the negative marginal effect of loss aversion on insurance demand increases with basis risk and the insurance premium. Our theoretical and empirical results combined illustrate the importance of considering both risk and loss aversion, as well as basis risk, in understanding index insurance decisions.

Suggested Citation

  • Shin, Soye & Magnan, Nicholas & Mullally, Conner & Janzen, Sarah, 2022. "Demand for Weather Index Insurance among Smallholder Farmers under Prospect Theory," Journal of Economic Behavior & Organization, Elsevier, vol. 202(C), pages 82-104.
    • Handle: RePEc:eee:jeborg:v:202:y:2022:i:c:p:82-104
    DOI: 10.1016/j.jebo.2022.07.027
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    More about this item

    Keywords

    Basis risk; index insurance; loss aversion; prospect theory; risk aversion; D81; G22; Q14;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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