Understanding Farmer's Valuation of Agricultural Insurance: Evidence from Viet Nam

Uninsured production shocks for farmers can lead to asset depletion, increased debt and reductions in consumption. One potential solution, area-yield index insurance, has failed to reach scale in developing countries. This... [ view full abstract ]

Uninsured production shocks for farmers can lead to asset depletion, increased debt and reductions in consumption. One potential solution, area-yield index insurance, has failed to reach scale in developing countries. This paper uses a novel approach to investigate the reasons for low demand for agricultural insurance and why a deviation exists between farmer’s valuation of agricultural insurance and the value of insurance implied by the standard micro-economic models based on expected utility theory. First, we find that private transfers, mainly from family members, reduce demand for insurance by insulating farmers from agricultural shocks. Second, membership of a farmer’s union, interpreted as a form pro-active behaviour, increases demand for agricultural insurance. Third, we help answer the puzzle why the most risk averse are least likely to take-up agricultural insurance. We find that over-confidence holds a positive and significant relationship with both willingness to pay (WTP) for agricultural insurance and the differential between WTP and the predicted economic value of insurance and interpret this as evidence that, within the context of implementation challenges and likely concerns about insurer viability, only the most confident are likely to purchase insurance. These results hold across a range of robustness checks.