Subsidy Policies and Insurance Demand

Jing Cai, Alain de Janvry, Elisabeth Sadoulet

NBER Working Paper No. 22702
Issued in September 2016
NBER Program(s):Development Economics

Many new products presumed to be privately beneficial to the poor have a high price elasticity of demand and ultimately zero take-up rate at market price. This has led governments and donors to provide subsidies to increase take-up, with the concern of trying to limit their cost. In this study, we use data from a two-year field experiment in rural China to define the optimum subsidy scheme that can insure a given take-up for a new weather insurance for rice producers. We build a model that includes the forces that are known to be determinants of insurance demand, provide reduced form confirmation of their importance, validate the dynamic model with out-of-sample predictions, and use it to conduct policy simulations. Results show that the optimum current subsidy necessary to achieve a desired take-up rate depends on both past subsidy levels and past payout rates, implying that subsidy levels should vary locally year-to-year.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w22702

Published: Jing Cai & Alain de Janvry & Elisabeth Sadoulet, 2020. "Subsidy Policies and Insurance Demand," American Economic Review, vol 110(8), pages 2422-2453. citation courtesy of