Risk sharing and the demand for insurance: Theory and experimental evidence from Ethiopia

Households in developing countries commonly engage risk sharing to cope with shocks. Despite this, the residual they remain exposed — often due aggregate events such as droughts and floods is considerable. To mitigate these risks, governments, NGOs multilateral organizations have introduced index insurance. appreciate its welfare implications, however, it necessary assess how insurance interacts pre-existing sharing. We ask what extent demand for compared standard indemnity depends on level of contribute by a simple theoretical framework which shows that, relative state autarky, between agents increases decreases In an artefactual field experiment Ethiopian farmers who share real life, we test confirm predictions.