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Can Insurance Payouts Prevent a Poverty Trap? Evidence from Randomized Experiments in Northern Kenya

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  • Yuma Noritomo

    (Graduate School of Economics, The University of Tokyo)

  • Kazushi Takahashi

    (National Graduate Institute for Policy Studies, Tokyo, Japan)

Abstract

Index-based insurance can have welfare-enhancing effects through two pathways: by mitigating weather-related shocks through payouts and by inducing policyholders to take greater yet more profitable risks. Most studies fail to distinguish between these two. Thus, we know little about which effects dominate and their long-term welfare implications. Using a random distribution of discount coupons and drought events that trigger payouts as exogenous variations, this study aims to identify both the ex ante risk-management and ex post payout effects of index insurance in a pastoral-dominant society of northern Kenya, where the presence of asset-based poverty traps, represented by bifurcated herd-size dynamics, has been established in the literature. We find the following: (1) Both risk-management and payout effects contribute to reducing the probability of distress sales of livestock; (2) payout effects also lead to a reduced slaughter of livestock; (3) while payout effects remain robust in a subsample of poorer households below the poverty trap threshold, riskmanagement effects do not. Overall, our results suggest that insurance payouts assist people in escaping from poverty traps more effectively than do behavioural changes accompanied by insurance purchases.

Suggested Citation

  • Yuma Noritomo & Kazushi Takahashi, 2019. "Can Insurance Payouts Prevent a Poverty Trap? Evidence from Randomized Experiments in Northern Kenya," GRIPS Discussion Papers 19-07, National Graduate Institute for Policy Studies.
    • Handle: RePEc:ngi:dpaper:19-07
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    Cited by:

    1. Takahashi, Kazushi & Noritomo, Yuma & Ikegami, Munenobu & Jensen, Nathaniel D., 2020. "Understanding pastoralists’ dynamic insurance uptake decisions: Evidence from four-year panel data in Ethiopia," Food Policy, Elsevier, vol. 95(C).
    2. Abdul Latif Alhassan & Noluyolo Magazi, 2021. "Microinsurance and household asset welfare in South Africa," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 46(3), pages 358-382, July.
    3. Benson K Kenduiywo & Michael R Carter & Aniruddha Ghosh & Robert J Hijmans, 2021. "Evaluating the quality of remote sensing products for agricultural index insurance," PLOS ONE, Public Library of Science, vol. 16(10), pages 1-24, October.
    4. Sandeep Mohapatra, 2021. "A new approach for detecting multiple‐equilibria poverty traps," Journal of International Development, John Wiley & Sons, Ltd., vol. 33(5), pages 894-909, July.
    5. Moritz, Laura & Kuhn, Lena & Bobojonov, Ihtiyor, 2022. "Crop index insurance for more welfare and climate resilience? An experimental approach," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322096, Agricultural and Applied Economics Association.

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