In discussing the paradoxical violation of expected utility theory that now bears his name, Maurice Allais noted that people tend to “greatly value,” or overweight, outcomes that are certain. This observation would seem to have powerful implications for the valuation of insurance in which individuals are oﬀered an uncertain beneﬁt in return for a certain cost. Pursuing this logic, we implemented experimental insurance games with cotton farmers in Burkina Faso, ﬁnding that on average, farmer willingness to pay for insurance increases signiﬁcantly when a premium rebate framing is used to render both costs and beneﬁts of insurance as uncertain.
Digging deeper, the Principal Investigator draws on the more recent work of Andreoni and Sprenger on a Discontinuous Preference for Certainty and show that that impact of the rebate framing on willingness to pay for insurance is driven by individuals who exhibit a well deﬁned discontinuous preference for certainty. Given that the potential impacts of insurance for small scale farmers is high, and yet demand for conventionally framed contracts is often low, we argue that the insights from this paper suggest new, welfare-enhancing ways of designing and marketing insurance for low income farmers.