Timing Inconsistency For Insurance (Casaburi & Willis)

Question 1

What is the goal of insurance

Answer 1

Risk reduction - transfer across states (from good to bad)

I.e when good, put money in to accommodate for a bad time

Question 2

What is the issue

Answer 2

To transfer across time - we pay a premium upfront, for an uncertain future payout.

(Hence why demand is low, and people are unwilling to pay the actuarially fair price for it! (Karlan))

Question 3

So main disadvantages of insurance (why demand low) (2)

Answer 3

Places all contract risk on buyer ((insurance market failure - however ECL solves)

Activates inter-temporal factors e.g present bias - value money today so may choose not to buy

Question 4

Why is demand for crop insurance ironic

B) why is insurance particularly costly for farmers?

Answer 4

Farmers face highly risky incomes, yet show consistently low demand for insurance. (Cash grants marketing, reducing basis risk proven little effect too)

As face cyclical incomes, so insurance helps reduce risk but hinders smoothing over time. (Since payment upfront, so uses all their money so limited money to tide over to next harvest)

Question 5

Casaburi and Willis: (in mock question)
How does timing of insurance matter affect demand

Answer 5

More take up paying at harvest (72%) compared to 5% paying upfront for insurance, 6% for upfront 30% off.

Supporting time inconsistency, they value present money way more

Question 6

What explains this (high take up at harvest, low upfront)
(3)

Answer 6

Intertemporal preferences - present bias

Intertemporal transfers - liquidity constraints as a result of Intertemporal preferences (no money pre-harvest to pay upfront since saving issues which can be behaviourally, but do have money straight after harvest!)

Counterparty risk - farmer or company may default on contract before the harvest, (so don’t wanna pay in case wont get it back)

Question 7

Does timing have a larger effect on the poor?

Answer 7

Yes - more buy at harvest proving the importance of timing of payment for insurancew

Question 8

Experiment: giving cash to easy liquidity constraints to the groups:

Findings
(Maybe just know overall result)

Answer 8

Paying upfront - now 13% farmers do
When paying upfront + cash - 33% take up
Pay at harvest - 76% take up
Pay at harvest + cash - 88%

Cash grants increases paying upfront, but effect is small when considering differences-in-differences (like Karlan proved, capital constraints aren’t the major issue)

Question 9

Experiment - one month delay in payment: effect
Research design

Answer 9

Farmers given a choice: free insurance or cash grant

And receive now, or in a month (but both decide now)

Question 10

Results:

Answer 10

Results indicate present bias - only 51% bought insurance who received choice now, compared to 72% choice in one month.

Question 11

With financial difficulty, some farmers may resort to side selling i.e selling cheaper.

Does insurance induce side selling? (To avoid premium payment)

Answer 11

No - they waited for insurance to come in and bail them out of the situation, suggesting trust isn’t a big issue (again implying it is more present bias!!)

Question 12

Main conclusion from Casaburi and Willis - what 2 factors are important

Answer 12

Present bias - Removing time inconsistency results in large rises in demand. (Paying at harvest way 72% more popular than upfront 5 and 6%)

Liquidity constraints (cash grants had a small effect)