After the Drought: The Impact of Microinsurance on Consumption Smoothing and Asset Protection

21 Pages Posted: 21 Apr 2020

See all articles by Sarah Janzen

Sarah Janzen

Kansas State University

Michael R. Carter

University of Wisconsin - Madison - Department of Agricultural & Applied Economics

Date Written: April 2019

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: Insurance, consumption smoothing, asset smoothing, poverty, Kenya

Suggested Citation

Janzen, Sarah and Carter, Michael R., After the Drought: The Impact of Microinsurance on Consumption Smoothing and Asset Protection (April 2019). American Journal of Agricultural Economics, Vol. 101, Issue 3, pp. 651-671, 2019, Available at SSRN: https://ssrn.com/abstract=3578925 or http://dx.doi.org/10.1093/ajae/aay061

Sarah Janzen (Contact Author)

Kansas State University

Michael R. Carter

University of Wisconsin - Madison - Department of Agricultural & Applied Economics ( email )

427 Lorch St.
Madison, WI 53706-1503
United States
608-263-2478 (Phone)

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