Barriers to Household Risk Management: Evidence from India

Abstract

Why do many households remain exposed to large exogenoussources of non-systematic income risk? We use a series of randomized field experiments in rural India to test the importance of price and non-price factors in the adoption of an innovative rainfall insurance product. We find demand is significantly price-elastic, but that even if insurance were offered with payout ratios similar to US, widespread coverage would not be achieved. We then identify key non-price frictions that limit demand: liquidity constraints, particularly among poor households, lack of trust, and limited salience. We suggest potential improvements in contract design to mitigate these frictions.