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Subsidy Policies and Insurance Demand
Jing Cai, Alain de Janvry, and Elisabeth Sadoulet
American Economic Review. Aug 2020, Vol. 110, No. 8: Pages 2422-2453

Subsidy Policies and Insurance Demand

Jing Cai1, Alain de Janvry2 and Elisabeth Sadoulet3

1University of Maryland, NBER, and BREAD (email: )

2University of California at Berkeley (email: )

3University of California at Berkeley (email: )

Abstract

Using data from a two-year pricing experiment, we study the impact of subsidy policies on weather insurance take-up. Results show that subsidies increase future insurance take-up through their influence on payout experiences. Exploring mechanisms of the payout effect, we find that for households that randomly benefited from financial education, receiving a payout provides a one-time learning experience that improves take-up permanently. In contrast, households with poor insurance knowledge continuously update take-up decisions based on recent experiences with disasters and payouts. Combining subsidy policies with financial education can thus be effective in promoting long-run insurance adoption. (JEL G22, G52, G53, Q54)