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Barriers to Household Risk Management: Evidence from IndiaShawn Allen ColeHarvard Business School Xavier GinéWorld Bank - Development Economics Research Group and Bureau for Research and Economic Analysis of Development (BREAD) Jeremy TobacmanUniversity of Pennsylvania; NBER Robert M. TownsendMassachusetts Institute of Technology (MIT) Petia B. TopalovaInternational Monetary Fund (IMF) James I. VickeryFederal Reserve Bank of New York April 11, 2012 American Economic Journal: Applied Economics, 5(1), 104-35 Harvard Business School Finance Working Paper No. 09-116 FRB of New York Staff Report No. 373 Abstract: Why do many households remain exposed to large exogenous sources of non-systematic income risk? We use a series of randomized field experiments in rural India to test the importance of price and non-price 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 U.S. insurance contracts. We present evidence suggesting that lack of trust, liquidity constraints and limited salience are significant non-price frictions that constrain demand. We suggest contract design improvements to mitigate these frictions.
Number of Pages in PDF File: 55 Keywords: Insurance, Household Finance, Trust, Liquidity Constraints, Financial Literacy, Economic Development JEL Classification: G22, C93, O16, D14, G11, G20 Accepted Paper SeriesDate posted: April 9, 2009 ; Last revised: January 22, 2013Suggested CitationContact Information
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