Risk and demand for incomplete insurance : Lab experiments with Guatemalan cooperatives

We report on a lab-in-the-field experiment on willingness to pay for index-based insurance run in 72 coffee cooperatives in Guatemala. Results show that demand for insurance increases with other uninsured risks (especially if they are correlated with insured risks) and with risk aversion, and that it declines when the worst states of nature are not insured. This is consistent with theory. We also explore demand for hybrid insurance where a group is insured on an index basis, and the group distributes compensations to insured members based on observed relative damages. We find that there is a strong demand for group insurance as a higher quality product, but that there is, in this case, a strong dislike for insuring as a group due to individualistic preferences. Demand for group insurance is also diminished by group heterogeneity, by lack of specification of the sharing rules, and by lack of a commitment device making the sharing rule enforceable.