Basis risk, social comparison, perceptions of fairness and demand for insurance: A field experiment in Ethiopia

Index insurance is considered an important strategy to reduce agricultural risk and increase smallholder farmers’ investments. However, insured farmers may develop mistrust of insurance if they experience crop losses and do not receive a payout, for instance because index insurance covers only a subset of covariate risks. At the same time, insurance for idiosyncratic risks would introduce differences in payouts within social networks, which might be considered unfair, introduce jealousy, and further depress demand for insurance. We conduct lab-in-the-field experiments with farmers in Ethiopia to examine the effects of a novel insurance approach that ensures insurance payouts for farmers with crop losses due to idiosyncratic events. We also examine the effects of informing farmers about their neighbors’ experiences alongside their own. We find that such social comparison increases perceived fairness of weather index insurance. In addition, providing complete insurance coverage for crop losses increases farmers’ perceived fairness of outcomes and willingness to pay, without introducing jealousy over neighbors receiving different payouts. Finally, we find that the increase in willingness to pay for complete insurance is concentrated among men and risk averse respondents.