Asymmetric information can be costly in insurance markets and can even hinder market development, as is the case for most agricultural insurance markets. I study information asymmetries in crop insurance in the Philippines using a randomized field experiment. Using a combination of preference elicitation, a two-level randomized allocation of insurance and detailed data collection, I test for and find evidence of adverse selection, moral hazard and their interaction – that is, selection on anticipated moral hazard behavior. I conclude that information asymmetry problems are substantial in this context and that variations on this experimental design may be useful in future work for identifying interactions between choice and treatment effects.
Una capacitación financiera simplificada basada en reglas prácticas mejoró las prácticas de negocios y los resultados económicos de microempresarios en República Dominicana, mientras que una capacitación técnica basada en principios contables tradicionales no produjo impactos significativos.
An audit study was conducted in Ghana, Mexico and Peru to understand the quality of financial information and products offered to low-income customers. Trained auditors visited multiple financial institutions, seeking credit and savings products. Consistent with Gabaix and Laibson (2006), staff only provides information about the cost when asked, disclosing less than a third of the total cost voluntarily. In fact, the cost disclosed voluntarily is uncorrelated with the expensiveness of the product. In addition, clients are rarely offered the cheapest product, most likely because staff is incentivized to offer more expensive and thus more profitable products to the institution. This suggests that clients are not provided enough information to be able to compare among products, and that disclosure and transparency policies may be ineffective because they undermine the commercial interest of financial institutions.
We experimentally test the impact of expanding access to basic bank accounts in Uganda, Malawi, and Chile. Over two years, 17%, 10%, and 3% of treatment individuals made five or more deposits, respectively. Average monthly deposits for them were at the 79th, 91st, and 96th percentiles of baseline savings. Survey data show no clearly discernible intention-to-treat effects on savings or any downstream outcomes. This suggests that policies merely focused on expanding access to basic accounts are unlikely to improve welfare noticeably since impacts, even if present, are likely small and diverse.
Using new data from a field experiment in India, we test hypotheses about micropension design in a poor population. We elicit demand for the basic micropension in addition to variants with different minimum withdrawal ages, government match rates, and options for lump sum withdrawal. A majority (80%) of respondents report interest in the micropension, and the amount they are willing to contribute would be enough to cover about 40% of expected old-age consumption. We find that prospective policyholders value the inability to access the assets until a particular age. We also find that they respond positively to the government match rate.
The Financial Inclusion Program (FIP) provides technical and financial support to rigourous evaluations and pilot projects related to financial service design, digital finance, and financial capability. The Program’s projects, which range in scale from pilots to multi-country randomized evaluations, are implemented across developing and advanced economies and focus on innovations that are informed by behavioral insights, are cost-effective, and present a promising business case for scale-up. FIP identifies new research projects and promising partnerships through open calls for proposals and periodic matchmaking and training events, and disseminates recent results through conferences, webinars, and publications.
Theoretically, weather-index insurance is an effective risk reduction option for small-scale farmers in low-income countries. Renewed policy and donor emphasis on bridging gender gaps in development also emphasizes the potential social safety net benefits that weather-index insurance could bring to women farmers who are disproportionately vulnerable to climate change risk and have low adaptive capacity. To date, no quantitative studies have experimentally explored weather-index insurance preferences through a gender lens, and little information exists regarding gender-specific preferences for (and constraints to) smallholder investment in agricultural weather-index insurance. This study responds to this gap, and advances the understanding of preference heterogeneity for weather-index insurance by analysing data collected from 433 male and female farmers living on a climate change vulnerable coastal island in Bangladesh, where an increasing number of farmers are adopting maize as a potentially remunerative, but high-risk cash crop. We implemented a choice experiment designed to investigate farmers’ valuations for, and trade-offs among, the key attributes of a hypothetical maize crop weatherindex insurance program that offered different options for bundling insurance with financial saving mechanisms. Our results reveal significant insurance aversion among female farmers, irrespective of the attributes of the insurance scheme. Heterogeneity in insurance choices could however not be explained by differences in men’s and women’s risk and time preferences, or agency in making agriculturally related decisions. Rather, gendered differences in farmers’ level of trust in insurance institutions and financial literacy were the key factors driving the heterogeneous preferences observed between men and women. Efforts to fulfill gender equity mandates in climate-smart agricultural development programs that rely on weather-index insurance as a risk-abatement tool are therefore likely to require a strengthening of institutional credibility, while coupling such interventions with financial literacy programs for female farmers.
Individuals across the world use high-transaction-cost savings devices, even when lower-cost technologies are available. High costs may help savers protect resources from the demands of others. I investigate this hypothesis by randomly assigning ATM cards to 1,100 newly-opened bank accounts in rural Kenya. These cards reduced withdrawal fees by 50 percent. While the cards increased overall account use, the positive treatment effect is entirely driven by joint and male-owned accounts. I also find that individuals with low levels of household bargaining power save less when accounts have ATM cards, while individuals with high levels of household bargaining power save more.
Through a field experiment in Afghanistan, we show that default enrollment in payroll deductions increases rates of savings by 40 percentage points, and that this increase is driven by present-biased preferences. Working with Afghanistan’s primary mobile phone operator, we designed and deployed a new mobile phone-based automatic payroll deduction system. Each of 967 employees at the country’s largest firm was randomly assigned a default contribution rate (either 0% or 5%) as well as a matching incentive rate (0%, 25%, or 50%). We find that employees initially assigned a default contribution rate of 5% are 40 percentage points more likely to contribute to the account 6 months later than individuals assigned to a default contribution rate of zero; to achieve this effect through financial incentives alone would require a 50% match from the employer. We also find evidence of habit formation: default enrollment increases the likelihood that employees continue to save after the trial ended, and increases employees’ self-reported interest in saving and sense of financial security. To understand why default enrollment increases participation, we conducted several interventions designed to induce employees to make a non-default election, and separately measured employee time preferences. Ruling out several competing explanations, we find evidence that the default effect is driven largely by present-biased preferences that cause the employee to procrastinate in making a non-default election.
Weather index insurance protects farmers against losses from extreme weather and facilitates investment in their farms, but randomized evaluations in South Asia and sub-Saharan Africa have shown low demand for these products at market prices, suggesting the need for alternative approaches.
Without substantial subsidies, take-up of insurance was low. Large discounts increased take-up substantially, and interventions designed to increase financial literacy or reduce basis risk also had positive effects. However, at market prices, take-up was in the range of 6–18 percent, which cannot sustain unsubsidized markets.
Insured farmers were more likely to plant riskier but higher-yielding crops. In the three studies that measured changes in farmer behavior, farmers who felt protected against weather risks shifted production toward crops that were more sensitive to weather but more profitable on average.
While self-sustaining markets for weather index insurance have not emerged, finding ways to address weather risk remains a priority for agricultural development. Some possibilities are improving index quality, providing subsidized insurance, selling insurance to institutions, and exploring other risk-mitigating technologies, such as irrigation and stress-tolerant crops.
Loans and business management training helped men grow their small business profits, but women did not experience any impacts on their businesses as a result of loans, training, or grants.
With the support of the Citi Foundation, the Financial Capability Initiative at IPA incubates, develops, and rigorously evaluates products and programs that improve the ability of the poor to make informed financial decisions and adopt healthy financial behaviors. The Initiative conducts tests and evaluations of innovative, product linked financial education interventions and financial products that aim to improve financial capability.
I use a field experiment in rural Kenya to study how temporary incentives to save impact long-run economic outcomes. Study participants who were randomly selected to receive large temporary interest rates on an individual bank account had signifi- cantly more income and assets 2.5 years after the interest rates expired. These changes are much larger than the short-run impacts on experimental bank account use and almost entirely driven by increased rates of entrepreneurship. Temporary interest rates directed to joint bank accounts had no detectable long-run impacts on entrepreneurship or income, but increased investment in household public goods and led to greater spousal consensus over financial matters. The short-run effects of modest unconditional cash payments were similar to those of the interest rates, but the cash payments had no apparent long-run impact on economic outcomes.
Anti-poverty programs in developing countries are often difficult to implement; in particular, many governments lack the capacity to deliver payments securely to targeted beneficiaries. We evaluate the impact of biometrically-authenticated payments infrastructure (“Smartcards”) on beneficiaries of employment (NREGS) and pension (SSP) programs in the Indian state of Andhra Pradesh, using a large-scale experiment that randomized the rollout of Smartcards over 157 subdistricts and 19 million people. We find that, while incompletely implemented, the new system delivered a faster, more predictable, and less corrupt NREGS payments process without adversely affecting program access. For each of these outcomes, treatment group distributions first-order stochastically dominated those of the control group. The investment was cost-effective, as time savings to NREGS beneficiaries alone were equal to the cost of the intervention, and there was also a significant reduction in the “leakage” of funds between the government and beneficiaries in both NREGS and SSP programs. Beneficiaries overwhelmingly preferred the new system for both programs. Overall, our results suggest that investing in secure payments infrastructure can significantly enhance “state capacity” to implement welfare programs in developing countries.
The pricing and advertising of tied add-ons and overages have come under increasing scrutiny. Working with a large Turkish bank to test SMS direct marketing promotions to 108,000 existing holders of “free” checking accounts, we find that promoting a large discount on the 60% APR charged for overdrafts reduces overdraft usage. In contrast, messages mentioning overdraft availability without mentioning price increase usage. Neither change persists long after messages stop, suggesting that induced overdrafting is not habit-forming. We discuss implications for interventions to promote transparency in pricing and advertising, and for models of shrouded equilibria, limited attention, and salience.