Policies and Insurance Demand

Many new products presumed to be privately beneficial to the poor have a high price elasticity of demand and ultimately zero take-up rate at market price. This has led governments and donors to provide subsidies to increase take-up, with the concern of trying to limit their cost. In this study, we use data from a two-year field experiment in rural China to define the optimum subsidy scheme that can insure a given take-up for a new weather insurance for rice producers. We build a model that includes the forces that are known to be determinants of insurance demand, provide reduced form confirmation of their importance, validate the dynamic model with out-of-sample predictions, and use it to conduct policy simulations. Results show that the optimum current subsidy necessary to achieve a desired take-up rate depends on both past subsidy levels and past payout rates, implying that subsidy levels should vary locally year-to-year. Jing Cai Department of Economics University of Michigan 611 Tappan Street Ann Arbor, MI 48109 and NBER [email protected] Alain de Janvry University of California at Berkeley 207 Giannini Hall Berkeley, CA 94720-3310 [email protected] Elisabeth Sadoulet University of California at Berkeley 207 Giannini Hall Berkeley, CA 94720-3310 [email protected]