Working Paper: NBER ID: w22702
Authors: Jing Cai; Alain de Janvry; Elisabeth Sadoulet
Abstract: Many new products presumed to be privately beneficial to the poor have a high price elasticity of demand and ultimately zero take-up rate at market price. This has led governments and donors to provide subsidies to increase take-up, with the concern of trying to limit their cost. In this study, we use data from a two-year field experiment in rural China to define the optimum subsidy scheme that can insure a given take-up for a new weather insurance for rice producers. We build a model that includes the forces that are known to be determinants of insurance demand, provide reduced form confirmation of their importance, validate the dynamic model with out-of-sample predictions, and use it to conduct policy simulations. Results show that the optimum current subsidy necessary to achieve a desired take-up rate depends on both past subsidy levels and past payout rates, implying that subsidy levels should vary locally year-to-year.
Keywords: subsidy policies; insurance demand; weather insurance; rice farmers; China
JEL Codes: D12; D83; G22; H20; O12; Q12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| subsidy levels (H23) | insurance demand (G52) |
| past subsidy levels (H23) | insurance demand (G52) |
| past payout rates (G35) | insurance demand (G52) |
| full subsidy in first year (H20) | second year demand for insurance (G52) |
| partial subsidy in first year (H23) | second year demand for insurance (G52) |
| receiving a payout (G35) | second year demand for insurance (G52) |
| no payout received (G35) | reduction in demand among those who paid for insurance (G52) |
| observing payouts in network (G35) | second year demand for insurance (G52) |
| experience of receiving payouts (G35) | future insurance decisions (G52) |