Microfinance Gateway>Risk, Credit, and Insurance in Peru: Field Experimental Evidence

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Library » Risk, Credit, and Insurance in Peru: Field Experimental Evidence

Risk, Credit, and Insurance in Peru: Field Experimental Evidence
Aug 2009, Galarza, F.

Understand demand for insurance and loans

This paper provides experimental evidence of insurance’s credit crowding-in effect in rural Peru.

Formal credit markets are constrained as potential borrowers fear losing collateral and therefore, hesitate to take loans. The introduction of insurance can help enhance demand for credit by reducing this fear.

The study recreated an environment similar to what farmers have in real life, through a baseline game where subjects had to choose between a safe production project and using an uninsured working capital loan. Further, in order to measure the effect of insurance on demand for loans, the study introduced a third project that involved producing cotton with an insured loan. Study results indicate that:

While a quarter of subjects chose to do the fallback project, about 60 percent switched to the insured loan project;
More than 50 percent of subjects chose the insured loan during the high stakes rounds;
Wealth is positively correlated with a greater probability of choosing the insured loan project;
Higher risk-averse subjects are less prone to choosing the insured loan.

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Journal Volume/Pages:
36

Publisher(s):
Munich University Library