Francesco Cecchi (WUR-DEC) Ambiguity Attitudes and Willingness to Pay for Weather Insurance: Experimental Evidence from Rural Kenya.

We investigate the impact of ambiguity attitudes and loss aversion on the willingness-to-pay for index insurance among smallholders in Kenya. Basis risk, or the difference between the index and losses actually incurred, is a source of ambiguity in index insurance, and is considered a key barrier to uptake. We gauge and validate incentive-compatible measures of loss aversion, ambiguity aversion and a-insensitivity—the inability to sufficiently discriminate between different levels of ambiguity. Next, we setup a BDM-style framed experiment to measure willingness-to-pay for a standard index insurance product, as well as a ‘rebate’ index insurance—where the premium payment is made ambiguous, too. Contrary to a previous experiment suggesting higher valuations for the ‘rebate’ insurance, we find no significant difference in WTP for the two designs, on average. Ambiguity-averse participants actually exhibit significantly lower willingness-to-pay in the ‘rebate’ treatment. Finally, we show that low willingness-to-pay is driven across treatments by a-insensitivity. This has important policy implications: if a-insensitive people indistinguishably overweight (low) probabilities of basis risk, the latter will be a hindrance to index insurance uptake no matter its likelihood. Our findings are in line with Prospect Theory and contribute to understanding how the workings of index insurance are perceived, underlining the need to design alternative insurance products that account for ambiguity attitudes.