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Time vs. State in Insurance: Experimental Evi-
dence from Contract Farming in Kenya
Working Paper No. 18, December 2016
Lorenzo Casaburi, Jack Willis
In the textbook model of insurance, income is trans-
ferred across states of the world, from good states to
bad. In practice, however, most insurance products
also transfer income across time: the premium is paid
upfront with certainty, and any payouts are made in
the future, if a bad state occurs. As a result, the
demand for insurance depends not just on risk aver-
sion, but also on several additional factors, including
liquidity constraints, intertemporal preferences, and
trust. Since these factors can also make it harder to
smooth consumption over time, and hence to self-
insure, charging the premium upfront may reduce
demand for insurance precisely when the potential
gains are largest, for example among the poor.
Crop insurance offers large potential welfare gains
This paper provides experimental evidence on the
consequences of the transfer across time in insurance,
by evaluating a crop insurance product which elimi-
nates this intertemporal transfer. Crop insurance
offers large potential welfare gains in developing
countries, as farmers face risky incomes and have
little savings to self-insure. Yet demand for crop
insurance has remained persistently low, in spite of
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The authors show that the intertemporal transfer can
help explain low insurance demand, especially
among the poor. They test a crop insurance product
which removes the intertemporal transfer in a ran-
domized control trial in Kenya. The product is inter-
linked with a contract farming scheme: as with other
inputs, the buyer of the crop offers the insurance and
deducts the premium from farmer revenues at harvest
time. The take-up rate is 72%, compared to 5% for
the standard upfront contract, and take-up is highest
among poorer farmers. Additional experiments and
outcomes indicate that liquidity constraints, present
bias, and counterparty risk are all important con-
straints on the demand for standard insurance. Fi-
nally, evidence from a natural experiment in the
United States, exploiting a change in the timing of
the premium payment for Federal Crop Insurance,
shows that the transfer across time also affects insur-
ance adoption in developed countries.
Insurance take-up rates across treatment groups in percent (N=605)
Main Experiment: Insurance Take-up by Treatment Group
Pay Upfront
Pay Upfront
Pay At Harvest
+30% Discount
80
60
40
20
0
Notes:
The figure shows insurance take-up
rates across the three treatment groups in the
main experiment. In the
Pay Upfront
group,
farmers had to pay the full-price premium
when signing up to the insurance. In the
Pay
Upfront +- 30% Discount
group, farmers also
had to pay the premium at sign-up, but received
a 30% price reduction. In the
Pay At Harvest
group, if farmers signed up to the insurance,
then the premium (including accrued interest at
1% per month) would be deducted from their
revenues at (future) harvest time. The bars cap-
ture 95% confidence intervals.
5%
6%
72%