After the Drought: The Impact of Microinsurance on Consumption Smoothing and Asset Protection

43 Pages Posted: 10 Dec 2013 Last revised: 12 Dec 2013

See all articles by Sarah Janzen

Sarah Janzen

Montana State University - Bozeman

Michael Carter

University of California, Davis

Date Written: December 2013

Abstract

To cope with shocks, poor households with inadequate access to financial markets can sell assets to smooth consumption and, or reduce consumption to protect assets. Both coping strategies can be economically costly and contribute to the transmission of poverty, yet limited evidence exists regarding the effectiveness of insurance to mitigate these costs in risk-prone developing economies. Utilizing data from an RCT in rural Kenya, this paper estimates that on average an innovative microinsurance scheme reduces both forms of costly coping. Threshold econometrics grounded in theory reveal a more complex pattern: (i) wealthier households primarily cope by selling assets, and insurance makes them 96 percentage points less likely to sell assets following a shock; (ii) poorer households cope primarily by cutting food consumption, and insurance reduces by 49 percentage points their reliance on this strategy.

Suggested Citation

Janzen, Sarah and Carter, Michael, After the Drought: The Impact of Microinsurance on Consumption Smoothing and Asset Protection (December 2013). NBER Working Paper No. w19702, Available at SSRN: https://ssrn.com/abstract=2366016

Sarah Janzen (Contact Author)

Montana State University - Bozeman ( email )

Bozeman, MT 59717-2920
United States

Michael Carter

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

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