Agricultural Insurance when Farmers Greatly Value Certainty: Results from Field Experiments in Burkina Faso

• Development Workshop

Date and Location

Monday, October 10, 2016, 4:10 PM - 5:30 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

In discussing the paradoxical violation of expected utility theory that now bears his name, Maurice Allais noted that people tend to "greatly value," or overweight, outcomes that are certain. This observation would seem to have powerful implications for the valuation of insurance in which individuals are offered an uncertain benefit in return for a certain cost. Pursuing this logic, we implemented experimental insurance games with cotton farmers in Burkina Faso, finding that 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 as uncertain. Digging deeper, we draw on the more recent work of Andreoni and Sprenger on a Discontinuous Preference for Certainty and show that that impact of the rebate framing on willingness to pay for insurance is driven by individuals who exhibit a well defined discontinuous preference for certainty. Given that the potential impacts of insurance for small scale farmers is high, and yet demand for conventionally framed contracts is often low, we argue that the insights from this paper suggest new, welfare-enhancing ways of designing and marketing insurance for low income farmers.