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Can Experiential Games and Improved Risk Coverage Raise Demand for Index Insurance? Evidence from Kenya
Author(s) -
Janzen Sarah,
Magnan Nicholas,
Mullally Conner,
Shin Soye,
Palmer I. Bailey,
Oduol Judith,
Hughes Karl
Publication year - 2021
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1111/ajae.12124
Subject(s) - indemnity , basis risk , experiential learning , index (typography) , actuarial science , product (mathematics) , risk management , insurance policy , business , risk aversion (psychology) , economics , expected utility hypothesis , finance , financial economics , computer science , psychology , mathematics education , mathematics , world wide web , geometry , capital asset pricing model
Uninsured risk impedes agricultural production, but traditional indemnity insurance is not a viable option for smallholder farmers due to market failures. Weather index insurance is often touted as an alternative risk management tool. Demand for weather index insurance, however, has been weak. One possible reason is basis risk, the mismatch between index insurance payouts and individual outcomes. We estimate the impact of two interventions on preferred coverage under a real index insurance product, as revealed through an auction: ( a ) a reduction in basis risk, and ( b ) an experiential game that teaches farmers how index insurance works, with an emphasis on basis risk. We show all farmers demonstrate strong sensitivity to basis risk. The experiential game modestly increased knowledge, and experiential game participants indicate higher levels of preferred insurance coverage. Although offering a lower basis risk insurance product and playing an experiential game both increase preferred coverage in isolation, there is no additional impact of doing both. We adapt a theoretical model of misattribution bias to demonstrate how reference‐dependent learning with loss aversion could lead to this unexpected result.