Barriers to household risk management: Evidence from India

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Why do many households remain exposed to large exogenous sources of non-systematic income risk? To answer this question, this paper uses a series of randomised field experiments in rural India to test the importance of price and non-price factors in the adoption of the innovative rainfall insurance product. Demand is significantly price sensitive, but widespread take-up would not be achieved even if the product offered a payout ratio comparable to U.S. insurance contracts. The study presents evidence suggesting that lack of trust, liquidity constraints and limited salience are significant non-price frictions that constrain demand and suggests contract design improvements to mitigate these frictions.

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Author: 

Shawn Cole, Xavier Giné, Jeremy Tobacman, Petia Topalova, Robert Townsend and James Vickery

Publisher: 

International Monetary Fund

Number of pages: 

43

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