This paper incorporates asset insurance into a theoretical poverty trap model to assess the aggregate impact of insurance access on chronic and transitory poverty. The research team uses dynamic stochastic programming methods to decompose two mechanisms through which a competitive asset insurance market might alter long-term poverty dynamics: ﬁrst, by breaking the descent into chronic poverty of vulnerable households (the vulnerability reduction effect) and, second, by incentivizing poor households to prudentially take on additional investment and craft a pathway from poverty (the investment incentive effect). In a stylized economy that begins with a uniform asset distribution, the existence of an asset insurance market cuts the long-term poverty headcount in half (from 50% to 25%), operating primarily through the vulnerability reduction effect. If insurance is partially subsidized, the headcount measure drops by another 10 percentage points, with the additional gains driven largely by the investment incentive effect.
Paper: Asset Insurance Markets and Chronic Poverty