Article | American Economic Journal: Applied Economics | January 2013

Barriers to Household Risk Management: Evidence from India

by Shawn A. Cole, Xavier Gine, Jeremy Tobacman, Petia Topalova, Robert M. Townsend and James Vickery

Abstract

Why do many households remain exposed to large exogenous sources of non-systematic income risk? We use a series of randomized field experiments in rural India to test the importance of price and non-price factors in the adoption of an innovative rainfall insurance product. Demand is significantly price sensitive, but widespread take-up would not be achieved even if the product offered a payout ratio comparable to U.S. insurance contracts. We present evidence suggesting that lack of trust, liquidity constraints, and limited salience are significant non-price frictions that constrain demand. We suggest contract design improvements to mitigate these frictions.

Keywords: Risk Management; Household Characteristics; India;

Citation:

Cole, Shawn A., Xavier Gine, Jeremy Tobacman, Petia Topalova, Robert M. Townsend, and James Vickery. "Barriers to Household Risk Management: Evidence from India." American Economic Journal: Applied Economics 5, no. 1 (January 2013): 104–135.