Centre for Public Policy to host talk on ‘Risk, Complexity, and the Demand for Agricultural Insurance’ on 16 January
The session will be led by Prof. Ashish Shenoy, UC Davis
10 January, 2025, Bengaluru: The Centre for Public Policy (CPP) at IIM Bangalore will host a talk on, ‘Risk, Complexity, and the Demand for Agricultural Insurance’, at 2 pm on 16 January 2025, at Classroom P-11 of IIMB. The session will be led by Prof. Ashish Shenoy, UC Davis.
About the speaker: Prof. Ashish Shenoy is an Associate Professor of Agricultural and Resource Economics at UC Davis. He studies development economics with a focus on migration, labor markets, agricultural productivity and policy implementation. He earned his PhD in Economics from MIT, before which he worked as a research professional at the University of Chicago Booth School of Business.
Abstract of talk: Agricultural insurance for smallholder farmers has proven to promote investment, prevent decapitalization and expand credit access in field trials, yet market demand remains low. One prominent factor diminishing its appeal is the presence of uninsured risks that generate mismatch between insurance payouts and earning shortfalls. Recent innovations focus on expanding the scope of covered risks, but doing so can introduce complexity that deters potential buyers. In this study, the researchers explore the trade-off between coverage and complexity in contracts that jointly insure output and sale price shocks for maize farmers in Northern Ghana. In a series of incentivized choices, the researchers elicit farmers' demand for insurance on a hypothetical plot while experimentally varying the payout states of the contract, the way the contract is presented, and participants' risk tolerance. It is found that participants value insurance: there is greater demand for products that jointly insure both output and price shortfalls rather than output alone, and demand falls when the payout structure induces risk-neutrality. However, willingness-to-pay for insurance remains well below its actuarially equivalent value under risk neutrality.
This finding is qualitatively consistent with recent behavioral and experimental research on complexity aversion in risky settings. Insurance valuation is lower among participants with weaker math skills and those without commercial farming experience. Quantitatively, undervaluation due to complexity is large enough to offset the utility gains from precisely targeting insurance payouts to states of revenue loss. Increasing transparency in how a contract is presented does not increase demand, suggesting that undervaluation does not stem merely from difficulties in understanding the contingencies under which insurance pays out. Overall, the research results suggest complexity aversion may limit the viability of an agricultural insurance market for smallholder farmers in developing settings.
Centre for Public Policy to host talk on ‘Risk, Complexity, and the Demand for Agricultural Insurance’ on 16 January
The session will be led by Prof. Ashish Shenoy, UC Davis
10 January, 2025, Bengaluru: The Centre for Public Policy (CPP) at IIM Bangalore will host a talk on, ‘Risk, Complexity, and the Demand for Agricultural Insurance’, at 2 pm on 16 January 2025, at Classroom P-11 of IIMB. The session will be led by Prof. Ashish Shenoy, UC Davis.
About the speaker: Prof. Ashish Shenoy is an Associate Professor of Agricultural and Resource Economics at UC Davis. He studies development economics with a focus on migration, labor markets, agricultural productivity and policy implementation. He earned his PhD in Economics from MIT, before which he worked as a research professional at the University of Chicago Booth School of Business.
Abstract of talk: Agricultural insurance for smallholder farmers has proven to promote investment, prevent decapitalization and expand credit access in field trials, yet market demand remains low. One prominent factor diminishing its appeal is the presence of uninsured risks that generate mismatch between insurance payouts and earning shortfalls. Recent innovations focus on expanding the scope of covered risks, but doing so can introduce complexity that deters potential buyers. In this study, the researchers explore the trade-off between coverage and complexity in contracts that jointly insure output and sale price shocks for maize farmers in Northern Ghana. In a series of incentivized choices, the researchers elicit farmers' demand for insurance on a hypothetical plot while experimentally varying the payout states of the contract, the way the contract is presented, and participants' risk tolerance. It is found that participants value insurance: there is greater demand for products that jointly insure both output and price shortfalls rather than output alone, and demand falls when the payout structure induces risk-neutrality. However, willingness-to-pay for insurance remains well below its actuarially equivalent value under risk neutrality.
This finding is qualitatively consistent with recent behavioral and experimental research on complexity aversion in risky settings. Insurance valuation is lower among participants with weaker math skills and those without commercial farming experience. Quantitatively, undervaluation due to complexity is large enough to offset the utility gains from precisely targeting insurance payouts to states of revenue loss. Increasing transparency in how a contract is presented does not increase demand, suggesting that undervaluation does not stem merely from difficulties in understanding the contingencies under which insurance pays out. Overall, the research results suggest complexity aversion may limit the viability of an agricultural insurance market for smallholder farmers in developing settings.