Thursday, April 29, 2010

Microinsurance, trust and economic development

An interesting working paper on microinsurance in China-

While a large literature has examined the importance of microfinance for fostering economic development, microinsurance has received much less attention. A recent paper by Hongbin Cai, Yuyu Chen, Hanming Fang, and Li-An Zhou is among the first to examine the causal effect of microinsurance on production behavior, in the context of hog farming in rural China. Pork meat is an important part the Chinese daily diet, but pork production is very vulnerable to adverse shocks, such as infectious disease and natural disasters. In China, hogs are predominantly raised by rural households as a sideline business. In 2007, the Chinese government implemented a subsidized sow insurance program in some regions with the goal of increasing pork supply to lower prices that had risen after a disease had caused high mortality among hogs. In order to let farmers know about this program and to encourage them to enroll, the government hired an animal husbandry worker in each village. The authors designed an experiment where they provided additional monetary incentives to randomly chosen animal husbandry workers for enrolling farmers in the sow insurance program. Villages where animal husbandry workers received higher incentives have a higher number of insured sows after the experiment. The authors then estimate the effect of this randomly generated variation in the number of insured sows on village sow production. They find that larger insurance coverage significantly increases the number of sows raised in a village. Although the insurance program was heavily subsidized, take-up rates were only around 50 percent. The authors provide evidence that low take-up rates can be attributed to a lack of trust in government sponsored insurance programs. Take-up rates increased after claims were paid out in some regions hit by a natural disaster, allowing farmers to learn about the credibility of the insurance product.

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