Welfare Impacts of Index Insurance in the Presence of a Poverty Trap. (June 2017)

• Record Type: Journal Article
• Authors: Chantarat, Sommarat; Mude, Andrew G.; Barrett, Christopher B.; Turvey, Calum G.
• Is Part Of: World development. Volume 94(2017)
• Page Start: 119
• Page End: 138
• Publication Date: 2017-06
• Subjects: index insurance -- asset risk -- poverty traps -- safety net -- risk preference elicitation -- Kenya; Economic history -- 1990- -- Periodicals; Economic assistance -- Developing countries -- Periodicals; 330.9
• DOI: 10.1016/j.worlddev.2016.12.044
• Languages: English
• ISSNs: 0305-750X

Abstract

Summary: This paper evaluates the welfare impacts of an index-based livestock insurance designed to compensate for satellite-based predicted livestock mortality in northern Kenya, where previous work has established the presence of poverty traps. We simulate household wealth dynamics based on rich panel and experimental data. The bifurcated livestock dynamics associated with the poverty trap gives rise to insurance valuation that is highly nonlinear in herd size. Estimated willingness to pay among vulnerable groups who most need insurance is, on average, lower than commercially viable rates. Targeted premium subsidization nonetheless appears to offer more cost-effective poverty reduction than need-based direct transfers.