Nber Working Paper Series after the Drought: the Impact of Microinsurance on Consumption Smoothing and Asset Protection

When natural disasters afflict poor communities that lack buoyant access to financial markets, households face the unsavory choice of reducing consumption in order to protect remaining assets, or selling assets at low prices in order to maintain consumption and nutrition. Both choices are costly and damage future economic potential. Formal insurance markets would seem to offer large private and social returns in these circumstances. This paper studies a drought-induced insurance payout from a pilot project in Kenya to determine whether insurance protects households from asset and consumption destabilization. Average treatment effect estimates show that insurance significantly reduces both kinds of costly coping. A closer examination using threshold estimation methods reveals that insurance has different impacts for different kinds of households. Households with larger asset bases--those shown to be most likely to sell assets in order to cope with a shock--are 64 percentage points less likely to do so when insured. Households with fewer assets--those most likely to decrease food intake as a coping strategy--are 43 percentage points less likely to do so with insurance. These results suggest that insurance can have a large impact on both the productivity of the current generation and the human capital of the next. Sarah A. Janzen Department of Economics Montana State University Bozeman, MN 59717; USA [email protected] Michael R. Carter Department of Agricultural and Resource Economics University of California, Davis One Shields Avenue Davis, CA 95616 and NBER [email protected]