Anticipating a negative income shock, uninsured households may refrain from undertaking proﬁtable, but risky activities. This ex-ante risk coping strategy is costly in terms of forgone income. Therefore, insuring households so that they are objectively (and subjectively) less exposed to risk can prevent them from adopting these welfare decreasing ex-ante behaviors. To test this hypothesis, we randomly distributed the possibility of being insured and feeling insured to a group of cotton cooperatives in Mali by giving them access to a microinsurance contract.
In a ﬁrst step, we estimate the average treatment eﬀect of the intervention by comparing the outcomes of households belonging to treated cooperatives to their counterparts in the control group. We ﬁnd that our randomization instrument had a signiﬁcant impact on households’ ex-ante behaviors at the extensive margin.
These intention to treat estimates show that oﬀering insurance resulted in a 15% increase in the area in cotton, and a 14% increase in the expenditure on seeds per ha. In addition, as a result of our randomization 22.5% of the treated farmers and 10% of the non-treated farmers knew that they are insured. We measured the impacts of perceived risk reduction and objective risk reduction at the individual level using two instrumental variable strategies. We ﬁnd that households who felt insured increased their area in cotton by more than 60%.