How Basis Risk and Spatiotemporal Adverse Selection Influence Demand for Index Insurance: Evidence from Northern Kenya

51 Pages Posted: 3 Aug 2014 Last revised: 10 Jan 2015

Nathaniel Duane Jensen

Cornell University - Dyson School of Applied Economics and Management

Andrew Mude

CGIAR - International Livestock Research Institute (ILRI)

Christopher B. Barrett

Cornell University - Charles H. Dyson School of Applied Economics & Management

Date Written: December 10, 2014

Abstract

Basis risk – the remaining risk that an insured individual faces – is widely acknowledged as the Achilles Heel of index insurance, but to date there has been no direct study of its role in determining demand for index insurance. Further, spatiotemporal variation leaves open the possibility of adverse selection. We use rich longitudinal household data from northern Kenya to determine which factors affect demand for index based livestock insurance (IBLI). We find that both price and the non-price factors studied previously are indeed important, but that basis risk and spatiotemporal adverse selection play a major role in demand for IBLI.

Keywords: Pastoralists, Uninsured Risk, Livestock, Adverse Selection, Basis Risk

JEL Classification: D81, O16, Q12

Suggested Citation

Jensen, Nathaniel Duane and Mude, Andrew and Barrett, Christopher B., How Basis Risk and Spatiotemporal Adverse Selection Influence Demand for Index Insurance: Evidence from Northern Kenya (December 10, 2014). Available at SSRN: https://ssrn.com/abstract=2475187 or http://dx.doi.org/10.2139/ssrn.2475187

Nathaniel Duane Jensen (Contact Author)

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

Andrew Mude

CGIAR - International Livestock Research Institute (ILRI) ( email )

P.O. Box 5689
Ababa
Kenya

Christopher B. Barrett

Cornell University - Charles H. Dyson School of Applied Economics & Management ( email )

315 Warren Hall
Ithaca, NY 14853-7801
United States
607-255-4489 (Phone)
607-255-9984 (Fax)

HOME PAGE: http://aem.cornell.edu/faculty_sites/cbb2/

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