Speaker
Description
Motivation and Research Question
Agricultural insurance plays a crucial role in helping farming systems manage climate-related risks. However, despite its potential, farmers' willingness to pay (WTP) remains low, especially for coverage against high-impact, low-probability weather shocks. To enhance WTP and insurance adoption, policymakers must understand how farmers' preferences vary across different contract designs. Yet, contract design is just one factor in the complex decision-making process, which is shaped by behavioral influences that should be considered for effective policy design.
i. whether farmers have a higher WTP for indemnity-based or index-based insurance and the behavioral and socio-demographic factors influencing these preferences;
ii. how heuristics (e.g., the availability heuristic) shape subjective probabilities and WTP for risk management tools.
To achieve this, we conducted a between-subjects experiment investigating the WTP of a sample of Italian tomato growers for drought insurance, considering two types of insurance designs - an innovative index-based insurance and a conventional indemnity-based instrument under different experimental conditions.
Methods
The experiment consists of five sequential tasks. In Task 1, farmers' availability heuristic is elicited under three different experimental conditions: neutral (no elicitation), past (reporting past drought damage to tomato production), and future (estimating potential future drought damage). In Task 2, farmers indicate their WTP for the different types of insurance schemes using the Becker-DeGroot-Marschak mechanism. Tasks 3-5 measure behavioral factors: Task 3 elicits time preferences using a multiple price list, Task 4 assesses subjective drought probabilities using a token assignment method, and Task 5 measures risk preferences using the Bomb Risk Elicitation Task (BRET). Participants receive financial compensation, with additional earnings based on task outcomes.
Results and Lessons Learned (for the design of agri-environmental policies)
Data collection began in March 2024 on the IndexPrin oTree platform, with the survey conducted online and fully guided by the researchers. To date, a sample of 83 tomato farmers has been surveyed. Preliminary results estimated using a Tobit model with random effects indicate that farmers have a higher WTP for index-based policy compared to an indemnity-based one, revealing potential for introducing this type of insurance to European farmers. In addition, the results show that older farmers and farmers with larger tomato areas have a higher WTP for insurance. Preliminary results of non-parametric tests show that the availability heuristic has no significant effect on farmers' WTP for insurance contracts. Similarly, it does not have a statistically significant effect on shaping farmers' behavioral factors.
| Keywords | insurance, heuristics, uncertainty, willingness to pay |
|---|---|
| Status of your work | First results |
| Early Career Researcher Award | Yes, the paper is eligible |
