Working Paper: NBER ID: w19702
Authors: Sarah A. Janzen; Michael R. Carter
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.
Keywords: Microinsurance; Consumption Smoothing; Asset Protection; Household Resilience; Drought
JEL Codes: G22; O12; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wealth threshold (I31) | different coping behaviors between households above and below certain asset level (D19) |
| microinsurance (G52) | reduction in likelihood of asset sales among wealthier households (D14) |
| microinsurance (G52) | reduction in reliance on cutting food consumption among poorer households (D12) |
| insurance payouts (G52) | reduction in likelihood of asset sales among wealthier households (D14) |