Health and Death Risk and Income Decisions: Evidence from Microfinance

Abstract

This paper examines the relationship between health and death risk and income decisions in rural Pakistan. Using data from a microfinance institution, we analyse how insurance against hospitalisation and accidental death influences the purpose of microcredit loans. After correcting for the endogeneity of insurance uptake, we find that individuals are more likely to maintain the same loan purpose as their previous loan if they are insured. The result suggests that households that are insured against hospitalisation and accidental death pursue less diversified income portfolios. This movement away from diversification may increase expected profits.

Keywords: health insurance, microfinance, income decisions, health risk, death risk

JEL Classification: D13, I12