Working Paper: NBER ID: w25026
Authors: Elena Serfilippi; Michael Carter; Catherine Guirkinger
Abstract: In discussing the paradoxical violation of expected utility theory that now bears his name, Maurice Allais noted that individuals tend to “greatly value” payoffs that are certain. Allais' observation would seem to imply that people will undervalue insurance relative to the predictions of expected utility theory because as conventionally constructed, insurance offers an uncertain benefit in exchange for a certain cost that certainty-loving individuals will overvalue. Pursuing this logic, we implemented insurance games with cotton farmers in Burkina Faso. On average, farmer willingness to pay for insurance increases significantly when a premium rebate framing is used to render both costs and benefits of insurance uncertain. We show that the impact of the rebate frame on the willingness to pay for insurance is driven by those farmers who exhibit a well-defined discontinuous preference for certainty, a concept that we adapt from the u-v model of utility and measure with a novel behavioral experiment. Given that the potential impacts of insurance for small scale farmers are high, and yet demand for conventionally framed contracts is often low, the insights from this paper suggest welfare-enhancing ways of designing insurance for low-income farmers.
Keywords: insurance; certainty; field experiment; Burkina Faso; willingness to pay
JEL Codes: D03; Q12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Framing of insurance contracts (G22) | Farmers' willingness to pay (Q11) |
| Premium rebate frame (Y20) | Farmers' willingness to pay (Q11) |
| Discontinuous preference for certainty (DPC) (D81) | Farmers' willingness to pay (Q11) |
| Framing effect (D91) | Farmers' willingness to pay (DPC vs non-DPC) (Q11) |