Macroinsurance for microenterprises: A randomized experiment in post-revolution Egypt ¬リニ

a r t i c l e i n f o Firms in many developing countries cite macroeconomic instability and political uncertainty as major constraints to their growth. We conduct a randomized experiment in post-revolution Egypt to measure the impact of insuring microenterprises against this uncertainty. Demand for macroeconomic shock insurance was high, with a take-up rate of 36.7%. However, purchasing insurance does not change the likelihood a business takes a new loan, the size of the loan, or how they invest this loan. We attribute this lack of effect to microenterprises largely investing in inventories and raw materials rather than irreversible investments like equipment, suggesting that macroeconomic and political risk is not inhibiting their investment behavior. The challenges of introducing an innovative insurance product in an environment where microentrepreneurs had little previous insurance exposure are particularly evident in a second year, where take-up was extremely low following political events that came close to, but did not, trigger insurance pay-outs. Policy uncertainty and macroeconomic instability are the two most common constraints to firm growth listed by firms in developing countries in the World Bank's Investment Climate Surveys, ranking ahead of taxes, regulation, corruption, and access to finance (World Bank, 2004). A large macro literature has highlighted the central role of uncertainty in investment decisions, especially as these investments become more irreversible. Increases in uncertainty temporarily increase the return to waiting for more information (Bernanke, 1983), increasing the option value of waiting to make investments (Dixit and Pindyck, 1994). The result is that higher uncertainty increases the region of inaction, in which firms are unwilling to hire and invest (or fire and disinvest), with business activity only picking up when uncertainty subsides (Bloom, 2009). The macroeconomic consequences of uncertainty have received increased attention in developed countries in the wake of the global financial crisis (e.g. Bloom, 2014). Meanwhile, the Arab Spring has resulted in dramatic increases in political and macroeconomic instability in much of the Middle-East and North Africa regions, but to date there has been little research on the consequences of these changes on firm behavior. Moreover, in neither developed nor developing countries have there been policy efforts to provide new tools for firms to actively protect themselves against some of the risks entailed by this uncertainty. 1 We use a randomized experiment to pilot a new product designed to provide insurance against macroeconomic and political shocks to mi-croenterprise owners, …