The Crowding-out Effect of Formal Insurance on Informal Risk Sharing Arrangements: An Experimental Study
نویسندگان
چکیده
An important issue with promoting formal insurance in the rural areas of developing countries that has been previously ignored is the interaction between formal insurance and preexisting informal risk sharing arrangements. This paper shows in theory that formal insurance will crowd out informal transfers even when individuals do not purchase insurance, which often makes the overall welfare impact of formal insurance negative. Our laboratory experiment indeed documents significant crowding-out effect. However, the overall welfare is improved when ex-ante income is equal but not when income inequality exists. The decision not to purchase formal insurance, the existence of ex-ante income inequality and altruistic motive are shown to reinforce the negative welfare impact of formal insurance.
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