Loss Aversion and the Demand for Index Insurance

80 Pages Posted: 19 Jun 2019

See all articles by Immanuel Lampe

Immanuel Lampe

University of St. Gallen

Daniel Würtenberger

University of Ulm - Department of Mathematics and Economics

Date Written: June 19, 2019

Abstract

This work analyzes if reference dependence and loss aversion can explain the puzzling low adoption rates of rainfall index insurance. We present a model that predicts the impact of loss aversion on index insurance demand to vary with different levels of insurance understanding. Index insurance demand of farmers who are unaware of the loss-hedging benefit that insurance provides decreases with loss aversion. In contrast, insurance demand of farmers who are aware of the loss-hedging benefit increases with loss aversion. The model further predicts that farmers who are unaware of the loss-hedging benefit will not demand an even highly subsidized index insurance. Using data from a randomized controlled trial involving a sample of Indian farmers we provide empirical support for our core conjecture that insurance understanding mitigates the negative impact of loss aversion on index insurance adoption.

Keywords: Prospect Theory, Reference Dependence, Microinsurance, Farm Household

JEL Classification: D91, G22, Q12

Suggested Citation

Lampe, Immanuel and Würtenberger, Daniel, Loss Aversion and the Demand for Index Insurance (June 19, 2019). University of St.Gallen, School of Finance Research Paper No. 2019/07 . Available at SSRN: https://ssrn.com/abstract=3406641 or http://dx.doi.org/10.2139/ssrn.3406641

Immanuel Lampe (Contact Author)

University of St. Gallen ( email )

Langgasse 1
St. Gallen, 9008
Switzerland

Daniel Würtenberger

University of Ulm - Department of Mathematics and Economics ( email )

Helmholzstrasse
Ulm, D-89081
Germany

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