The Demand for Insurance under Limited Trust: Evidence from a Field Experiment in Kenya
September 21, 2016Poverty and Applied Microeconomics Seminar Series

Speaker: Andrew Zeitlin is an Assistant Professor at the McCourt School of Public Policy at Georgetown University. More »

Abstract: In spite of strong theoretical reasons to believe in the welfare-enhancing value of microinsurance products, demand for such products to date has been disappointingly low across a range of developing countries. In this paper we investigate the role of trust in the demand for indemnity insurance. First, we develop a theoretical model of insurance demand under limited trust to derive predictions for the way trust, risk aversion, and insurance premiums interact. Second, we test these predictions using field and laboratory-experimental data from a randomized controlled trial introducing a composite health insurance product to tea farmers in Kenya. Consistent with the theory, we find that not only low trust but also risk aversion is negatively associated with insurance demand, and that individuals with low trust are more responsive to experimental variation in premium costs. Third, we combine take-up decisions with subjective probability distributions for health costs to structurally estimate the model. Structural estimates reveal that choices are consistent with pessimistic and heterogeneous beliefs about the probability of insurance payouts for indemnified events. These estimates allow us to calculate welfare losses relative to counterfactual insurance products that are (perceived as) fully credible: expected losses from foregone insurance due to low trust exceed 31 percent of premium costs. Our results suggest that limited trust is an important barrier to the adoption of insurance, particularly among poor and risk-averse households who stand to benefit the most from such financial products.


Last Updated: Sep 16, 2016

The Poverty and Applied Micro Seminar Series is a weekly series hosted by the World Bank's research department. The series invites leading researchers in applied microeconomics from the fields of poverty, human development and public service delivery, agriculture and rural development, political economy, behavioral economics, private sector development, and a range of other fields to present the results of their most recent research in a seminar format. The full list of seminars can be viewed here.

Event Details
  • Date: September 21, 2016
  • Location: MC 3-570
  • Time: 12:30 - 2:00 pm
  • CONTACT: Shweta Mesipam

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