After the Drought: The Impact of Microinsurance on Consumption Smoothing and Asset Protection

Sarah A. Janzen, Michael R. Carter

Research output: Contribution to journalArticlepeer-review

Abstract

To cope with shocks, poor households with inadequate access to financial markets can sell assets to smooth consumption and, or reduce consumption to protect assets. Both coping strategies can be economically costly and contribute to the transmission of poverty, yet limited evidence exists regarding the effectiveness of insurance to mitigate these costs in risk-prone developing economies. Utilizing data from an RCT in rural Kenya, this paper estimates that on average an innovative microinsurance scheme reduces both forms of costly coping. Threshold econometrics grounded in theory reveal a more complex pattern: (i) wealthier households primarily cope by selling assets, and insurance makes them 96 percentage points less likely to sell assets following a shock; (ii) poorer households cope primarily by cutting food consumption, and insurance reduces by 49 percentage points their reliance on this strategy.

Original languageEnglish (US)
Article numberaay061
Pages (from-to)651-671
Number of pages21
JournalAmerican Journal of Agricultural Economics
Volume101
Issue number3
DOIs
StatePublished - 2019
Externally publishedYes

Keywords

  • asset smoothing
  • consumption smoothing
  • Insurance
  • Kenya
  • poverty

ASJC Scopus subject areas

  • Agricultural and Biological Sciences (miscellaneous)
  • Economics and Econometrics

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