Abstract
Index insurance offers an innovative risk management solution for uninsured agricultural weather risk. We investigate the theoretical relationship between prospect theory risk preferences and characteristics of index insurance. We pair these theoretical findings with data from a lab-in-the-field experiment in Kenya. Empirically, we find that insurance demand is decreasing in loss aversion, and the negative marginal effect of loss aversion on insurance demand increases with basis risk and the insurance premium. Our theoretical and empirical results combined illustrate the importance of considering both risk and loss aversion, as well as basis risk, in understanding index insurance decisions.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 82-104 |
| Number of pages | 23 |
| Journal | Journal of Economic Behavior and Organization |
| Volume | 202 |
| DOIs | |
| State | Published - Oct 2022 |
Keywords
- Basis risk
- D81
- G22
- Q14
- index insurance
- loss aversion
- prospect theory
- risk aversion
ASJC Scopus subject areas
- Economics and Econometrics
- Organizational Behavior and Human Resource Management