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Risk preference or financial literacy? Behavioural experiment on index insurance demand

Author

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  • Awel Y.
  • Azomahou T.T.

    (UNU-MERIT)

Abstract

We use unique cross-sectional household data from Ethiopia to investigate the effect of risk preference, financial literacy and other socio-economic characteristics on demand for index insurance. We measure risk preference based on survey experiments using lottery choice game with real monetary prizes. First, we find no evidence of risk aversion on demand for index insurance. Second, we find positive impact of financial literacy on purchasing insurance. Third, relaxing liquidity constraint enhance the take-up of insurance. Finally, demographic and village characteristics have little role in the decision to uptake insurance. These findings have implications on product design and marketing strategies. The product design should focus on ways that better account for liquidity constraint of the household. Interventions that strengthen efforts in provision of financial literacy programmes are worthy. Our results are robust to changes in specification and estimation method.

Suggested Citation

  • Awel Y. & Azomahou T.T., 2015. "Risk preference or financial literacy? Behavioural experiment on index insurance demand," MERIT Working Papers 2015-005, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    • Handle: RePEc:unm:unumer:2015005
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    2. Haruna, Bashiru & Sohngen, Brent & Yahaya, Iddrisu & Wiredu, Alexander Nimo, 2017. "Effects Of Weather-Index Insurance: The Case Of Smallholder Maize Farmers In Northern Ghana," International Journal of Food and Agricultural Economics (IJFAEC), Alanya Alaaddin Keykubat University, Department of Economics and Finance, vol. 5(3), July.

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    More about this item

    Keywords

    Risk aversion; financial literacy; weather index insurance; lottery choice game; Ethiopia;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G2 - Financial Economics - - Financial Institutions and Services
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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