Liquidity constraints, informal institutions, and the adoption of weather insurance: A randomized controlled Trial in Ethiopia

Temesgen Belissa, Erwin Bulte, Francesco Cecchi, Shubhashis Gangopadhyay, Robert Lensink

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We report the results of a drought insurance experiment in Ethiopia, and examine whether uptake of index-based insurance is enhanced if we allow farmers to pay after harvest (addressing a liquidity constraint). We also test to what extent uptake can be enhanced by promoting insurance via informal risk-sharing institutions (Iddirs), to reduce trust and information problems. The delayed payment insurance product increases uptake substantially when compared to standard insurance, from 8% to 24%, and leveraging informal institutions results in even greater uptake (43%). We also find suggestive evidence that the delayed premium product is indeed better at targeting the liquidity constrained. However, default rates associated with delayed payments are relatively high and concentrated in a small number of Iddirs - potentially compromising the economic viability of the novel product. We discuss how default rates can be reduced.

Original languageEnglish
Pages (from-to)269-278
Number of pages10
JournalJournal of Development Economics
Early online date29-Jun-2019
Publication statusPublished - Sept-2019


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