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Moral Hazard Incentives under Formal Insurance and Informal Insurance: Evidence from a Framed Field Experiment

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  • Aisha Nanyiti
  • Haki Pamuk

Abstract

This paper explores moral hazard incentives associated with formal and informal insurance. We develop a theoretical model of risky effort that incorporates formal insurance and informal risk sharing, and test model predictions through a real-effort experiment with smallholder farmers in rural Uganda. Consistent with the theory, we find evidence of moral hazard under informal insurance. We, however, do not find evidence of moral hazard under formal insurance in our experiment. Experiencing a bad outcome, however, makes the risk in production more salient to farmers, and they increase their insurance coverage. These results suggest there may be some space for expanding indemnity-based insurance to smallholder farmers through awareness programmes.

Suggested Citation

  • Aisha Nanyiti & Haki Pamuk, 2025. "Moral Hazard Incentives under Formal Insurance and Informal Insurance: Evidence from a Framed Field Experiment," Journal of African Economies, Centre for the Study of African Economies, vol. 34(1), pages 80-115.
    • Handle: RePEc:oup:jafrec:v:34:y:2025:i:1:p:80-115.
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    File URL: http://hdl.handle.net/10.1093/jae/ejae001
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    More about this item

    Keywords

    formal insurance; informal insurance; moral hazard; JEL classification: D1; D15; D81;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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