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Barriers to Household Risk Management: Evidence from India

55 Pages Posted: 9 Apr 2009 Last revised: 22 Jan 2013

Shawn Allen Cole

Harvard Business School

Xavier Giné

World Bank - Development Research Group (DECRG)

Jeremy Tobacman

Alfred Lerner College of Business and Economics, University of Delaware

Robert M. Townsend

Massachusetts Institute of Technology (MIT)

Petia B. Topalova

International Monetary Fund (IMF)

James I. Vickery

Federal Reserve Bank of New York

Multiple version iconThere are 3 versions of this paper

Date Written: April 11, 2012

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.

Keywords: Insurance, Household Finance, Trust, Liquidity Constraints, Financial Literacy, Economic Development

JEL Classification: G22, C93, O16, D14, G11, G20

Suggested Citation

Cole, Shawn Allen and Giné, Xavier and Tobacman, Jeremy and Townsend, Robert M. and Topalova, Petia B. and Vickery, James I., Barriers to Household Risk Management: Evidence from India (April 11, 2012). Harvard Business School Finance Working Paper No. 09-116; 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. Available at SSRN: https://ssrn.com/abstract=1374076 or http://dx.doi.org/10.2139/ssrn.1374076

Shawn Allen Cole (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Xavier Gine

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

HOME PAGE: https://sites.google.com/site/decrgxaviergine/

Jeremy Tobacman

Alfred Lerner College of Business and Economics, University of Delaware ( email )

Newark, DE 19716
United States

Robert M. Townsend

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Petia B. Topalova

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

James Ian Vickery

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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