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Only the Rich Need Apply? A Dynamic Model of Index-Based Insurance Choice

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  • Farrin, Katie

Abstract

I present a dynamic expected utility model to explain farmers’ borrowing decisions and observed low demand for index-based agricultural insurance. Results indicate that, in the absence of insurance, only low- and medium-wealth households access credit for farming and consumption. Once insurance contracts become available, however, cases exist in which borrowing initially declines with wealth until a critical wealth level is reached, after which wealthier households take out loans in order to purchase insurance. Implications of simulations suggest that index-based products may not be tailored for the ultra-poor, who must borrow the maximum amount simply to meet consumption needs. As such, researchers piloting index-based insurance programs must seriously consider the effects of liquidity constraints on contract uptake.

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  • Farrin, Katie, 2012. "Only the Rich Need Apply? A Dynamic Model of Index-Based Insurance Choice," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124679, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea12:124679
    DOI: 10.22004/ag.econ.124679
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    Risk and Uncertainty;

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