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

The Wharton School, University of Pennsylvania; NBER

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
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Xavier Gine

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

1818 H. Street, N.W.
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HOME PAGE: https://sites.google.com/site/decrgxaviergine/

Jeremy Tobacman

The Wharton School, University of Pennsylvania ( email )

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Philadelphia, PA 19104
United States
2158989450 (Phone)

HOME PAGE: http://assets.wharton.upenn.edu/~tobacman/

NBER ( email )

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Robert M. Townsend

Massachusetts Institute of Technology (MIT) ( email )

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Cambridge, MA 02139-4307
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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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