Peer review

We report the results of a drought insurance experiment in Ethiopia, and examine whether uptake of index-based insurance is enhanced if we allow farmers to pay after harvest (addressing a liquidity constraint). We also test to what extent uptake can be enhanced by promoting insurance via informal risk-sharing institutions (Iddirs), to reduce trust and information problems. The delayed payment insurance product increases uptake substantially when compared to standard insurance, from 8% to 24%, and leveraging informal institutions results in even greater uptake (43%). We also find suggestive evidence that the delayed premium product is indeed better at targeting the liquidity constrained. However, default rates associated with delayed payments are relatively high and concentrated in a small number of Iddirs - potentially compromising the economic viability of the novel product. We discuss how default rates can be reduced.

We would like to thank ESRC/DFID (ES/N013344/1 “Delivering Inclusive Financial Development and Growth”), 3ie (TW13.1014) and CIMMYT (CGIAR Research Program on Maize) for financial support.

Text in English