Asymmetric Wealth Effect of Subsidized Index Contracts
RCTClinical Trial
Microinsurance contracts require upfront premium payments that could theoretically depress household wealth in non-payout years, potentially altering labor supply decisions. Heavily subsidizing insurance premiums ensures high adoption while minimizing negative wealth effects in normal years, creating a sharp asymmetric positive wealth shock only during indemnified shock years.
Picture this
Imagine buying a lottery ticket that costs $1, but pays out $1,000 if a major storm hits. Paying $1 during normal weather is so cheap that it does not change weekly spending or force extra work hours to make up for the cost. However, on storm days when the ticket pays out $1,000, a sudden cash injection allows the holder to take time off work. The tiny upfront cost causes no noticeable disruption in normal times, but the large payout creates a dramatic change in labor behavior during emergency times.
What the evidence says
Overall insurance take-up reached 42%. In non-payout villages, labor participation differences between insured and uninsured workers were statistically zero (p > 0.10, point estimate -4.6 days), whereas in payout villages, insurance payouts (Rs. 300 to Rs. 1,200) reduced labor participation by 28.5 percentage points and days worked by 15.44 days.
- Who was studied
- 4,667 households across 42 treatment villages in India receiving subsidized insurance offers at average price Rs. 145 (with 0% to 75% randomized discounts).
- How
- Randomized subsidy trial embedded within rainfall index insurance marketing across payout (4 villages) and non-payout villages (38 villages).
What to do
Subsidize weather index premiums for low-income households to prevent ex-ante negative income shocks during non-trigger years while maintaining strong ex-post shock protection.
From the source
"While the insured paid some premiums, Figure 1 shows that the vast majority who purchased insurance bought the contract at highly subsidized rates (randomized discounts of 75% or 50%). The net costs of subsidized insurance (Rs. 80 per unit) are far below the values of the indemnification payouts in the payout villages (which ranged from Rs. 300 to Rs. 1200 per unit)."
Risk, Insurance and Wages in General Equilibrium