The Subjective Well-being Effects of Imperfect

Transcript:The Subjective Well-being Effects of Imperfect:
The Subjective Well-being Effects of Imperfect Insurance that Doesn’t Pay out Kibrom Hirfrfot Christopher Barrett Erin Lentz Birhanu Taddesse Cornell University July 28, 2014 Most people are risk averse (Rosenzweig & Binswanger, 1993) In theory, actuarially fair insurance improves welfare regardless of payout. Insurance usually not actuarially fair – loading. But, there is still demand – offers peace of mind. Assessing welfare gains in expected benefit terms is misleading. There is little evidence that insurance generates welfare gains. Low uptake of index insurance suggest no welfare gains from insurance (Gine et al. 2008; Cole et al. 2013; Binswanger-Mkhize, 2012) However, Jensen et al. (2014) find index insurance produces net utility benefit in Kenya. Yet if one believes in DARA, the poor stand to gain the most from insurance. We explore whether an imperfect insurance improves subjective well-being (SWB) for a poor, rural population. Novel approach: we exploit panel nature of data and no indemnity payout to test buyers’ remorse. Does index insurance lead to welfare gains? We use data from eight woredas in the Borana zone of southern Ethiopia. Mobile pastoralism is main means of sustenance. Study setting and index insurance Cyclical movement in search of forage and water is common. Indigenous insurance institutions have declined due to recurrent drought. Index based livestock insurance (IBLI) was introduced in August 2012. Uses NDVI to identify premiums and makes indemnity payout based on observable, exogenous index of rangeland conditions for each woreda. Payout is made when vegetation falls below a contractually stipulated threshold. There are four season in Borana: long rainy, long dry, short rainy, short dry. IBLI contracts are sold in two sales periods before the rainy seasons. l Study setting and index insurance (cont’d) Three rounds of data have been collected A random sub-sample of respondents received discount coupons. Others received information extension. Some received both. Information extension: Poem tape and Comic books To date, there have been no indemnity payouts. Households who bought IBLI are materially worse off, but could be better off in broader well-being terms. Are they? Data Estimation strategy Estimation strategy (cont’d) Estimation strategy (cont’d) Ordered logit regression estimates Results (cont’d) Controls : Household head gender, age, age squared, schooling, and household size. Standard errors clustered at the reera level in parentheses *** p<0.01, ** p<0.05, * p<0.1 In all 3 models, IBLI has a positive and significant effect on SWB. Our result is robust to