Insurance Contracts When Individuals “Greatly Value” Certainty: Results from a Field Experiment in Burkina Faso

28 Pages Posted: 17 Sep 2018 Last revised: 20 May 2021

See all articles by Elena Serfilippi

Elena Serfilippi

Committee on Sustainability Assessment

Michael Carter

University of California, Davis

Catherine Guirkinger

University of Namur - Centre de Recherche en Economie du Developpement (CRED)

Date Written: September 2018

Abstract

In discussing the paradoxical violation of expected utility theory that now bears his name, Maurice Allais noted that individuals tend to “greatly value” payoffs that are certain. Allais' observation would seem to imply that people will undervalue insurance relative to the predictions of expected utility theory because as conventionally constructed, insurance offers an uncertain benefit in exchange for a certain cost that certainty-loving individuals will overvalue. Pursuing this logic, we implemented insurance games with cotton farmers in Burkina Faso. On average, farmer willingness to pay for insurance increases significantly when a premium rebate framing is used to render both costs and benefits of insurance uncertain. We show that the impact of the rebate frame on the willingness to pay for insurance is driven by those farmers who exhibit a well-defined discontinuous preference for certainty, a concept that we adapt from the u-v model of utility and measure with a novel behavioral experiment. Given that the potential impacts of insurance for small scale farmers are high, and yet demand for conventionally framed contracts is often low, the insights from this paper suggest welfare-enhancing ways of designing insurance for low-income farmers.

Suggested Citation

Serfilippi, Elena and Carter, Michael and Guirkinger, Catherine, Insurance Contracts When Individuals “Greatly Value” Certainty: Results from a Field Experiment in Burkina Faso (September 2018). NBER Working Paper No. w25026, Available at SSRN: https://ssrn.com/abstract=3250543

Elena Serfilippi (Contact Author)

Committee on Sustainability Assessment ( email )

1008 S 9th St
Philadelphia, PA 19147
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Michael Carter

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

Catherine Guirkinger

University of Namur - Centre de Recherche en Economie du Developpement (CRED) ( email )

Rue de Bruxelles 61
Namur, 5000
Belgium

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