How credit, insurance, and informal risk sharing interact is a fundamental question in development economics. This paper exploits a natural experiment wherein tens of thousands of microfinance borrowers across rural Haiti received a quasi-random value of insurance benefit in the aftermath of catastrophic hurricanes, with claims review conducted by a peer. Using administrative banking records combined with data from field survey, this study shows that greater insurance increased a beneficiary's demand for credit on the extensive margin, e.g. made formal lending relationships more durable. In contrast, formal insurance substantially reduced informal borrowing as well as the duration of informal risk sharing relationships. Turning to the claims adjudication mechanism, the study shows the differential informal proximity between claimants and peer reviewers substantially biased within-village payouts. In sum, the insurance policy strengthened formal credit markets at the cost of weakening informal risk sharing networks that, themselves, influenced the allocation of the policy's benefits.
Paper: Credit Demand Among Risk Sharing Groups Under Formal Insurance