The Social Dilemma of Microinsurance: A Framed Field Experiment on Free-Riding and Coordination

Description: 

This paper analyses free-riding and coordination problems in microinsurance. The proposition is that the demand for insurance suffers from a social dilemma when formal insurance is introduced in existing risk-sharing networks. Less risk averse individuals offering welfare-improving insurance are tempted to free-ride on the enrolment of their network members while the more risk averse may fail to coordinate. This results in suboptimal demand. Group insurance binds both types to the social optimum. A framed laboratory experiment in Tanzania elicits demand for group versus individual insurance among microcredit clients who typically share risk through joint liability. The experiment demonstrates substantial free-riding but only limited coordination failures. These findings extend the literature on strategic decisions in the presence of a public good and provide a potential explanation for the low take-up of microinsurance.

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Author: 

Wendy Janssens

Published by: 

  • Other

Publisher: 

Tinbergen Institute

Number of pages: 

62

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