Asset Insurance Markets and Chronic Poverty

• Development Workshop

Date and Location

Monday, April 10, 2017, 4:10 PM - 5:30 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

This paper incorporates asset insurance into a theoretical poverty trap model to assess the aggregate impact of insurance access on chronic poverty. We use dynamic stochastic programming methods to decompose two mechanisms through which a competitive asset insurance market might alter longterm poverty dynamics: first, by breaking the descent into chronic poverty of vulnerable households (the vulnerability reduction effect) and, second, by incentivizing poor households to prudentially take on additional investment and craft a pathway from poverty (the investment incentive effect). In a stylized economy that begins with a uniform asset distribution, the existence of an asset insurance market cuts the long-term poverty headcount in half (from 50% to 25%), operating primarily through the vulnerability reduction effect. If insurance is partially subsidized, the headcount measure drops by another 10 percentage points, with the additional gains driven largely by the investment incentive effect.