Learning from Lemons: The Role of Government in Index Insurance for Individuals

FERDI Policy Brief, No. 70

5 Pages Posted: 11 Sep 2015

See all articles by Daniel Clarke

Daniel Clarke

Disaster Risk Financing and Insurance Program, World Bank,

Liam Wren-Lewis

Paris School of Economics (PSE)

Date Written: July 2013

Abstract

This paper considers the potential role of government in aiding the scale-up of high quality index insurance products in developing countries. In particular, we analyse optimal public policy in light of the fact that index insurance policies are typically credence goods - that is, the basis risk of a given policy cannot be distinguished by consumers before purchase and only to a limited extent after purchase. We discuss two potential market failures that stem from this property that governments may seek to correct: low takeup and low investment in reducing basis risk. In each case, we consider the costs and benefits of various alternative government policies. We show that policies aimed to improve take-up may improve or worsen incentives for investment, and that the precise nature of these effects will depend on the government’s ability to commit, the marginal cost of funds, and their potential to identify the inputs necessary for constructing a high quality index.

JEL Classification: G22, O13, O16

Suggested Citation

Clarke, Daniel and Wren-Lewis, Liam, Learning from Lemons: The Role of Government in Index Insurance for Individuals (July 2013). FERDI Policy Brief, No. 70. Available at SSRN: https://ssrn.com/abstract=2659210 or http://dx.doi.org/10.2139/ssrn.2659210

Daniel Clarke

Disaster Risk Financing and Insurance Program, World Bank, ( email )

Washington, DC 20433
United States

Liam Wren-Lewis (Contact Author)

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

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