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American Economic Journal: Applied Economics: Vol. 5 No. 1 (January 2013)

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Barriers to Household Risk Management: Evidence from India

Article Citation

Cole, Shawn, Xavier Giné, Jeremy Tobacman, Petia Topalova, Robert Townsend, and James Vickery. 2013. "Barriers to Household Risk Management: Evidence from India." American Economic Journal: Applied Economics, 5(1): 104-35.

DOI: 10.1257/app.5.1.104

Abstract

Why do many households remain exposed to large exogenous sources of nonsystematic income risk? We use a series of randomized field experiments in rural India to test the importance of price and nonprice factors in the adoption of an innovative rainfall insurance product. Demand is significantly price sensitive, but widespread take-up would not be achieved even if the product offered a payout ratio comparable to US insurance contracts. We present evidence suggesting that lack of trust, liquidity constraints, and limited salience are significant nonprice frictions that constrain demand. We suggest possible contract design improvements to mitigate these frictions. (JEL D14, D81, O12, O13, O16, O18, Q12)

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Authors

Cole, Shawn (Harvard U)
Giné, Xavier (World Bank)
Tobacman, Jeremy (U PA)
Topalova, Petia (IMF)
Townsend, Robert (MIT)
Vickery, James (Federal Reserve Bank of New York)

JEL Classifications

D14: Personal Finance
D81: Criteria for Decision-Making under Risk and Uncertainty
O12: Microeconomic Analyses of Economic Development
O13: Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Products
O16: Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
O18: Economic Development: Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
Q12: Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

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