The introduction of formal insurance and its effect on redistribution

Abstract

Transfers motivated by altruism, guilt, and norms of giving play an important role in supporting individuals who suffer losses due to risk. We present empirical evidence from an artefactual field experiment in Ethiopia in which we introduce formal insurance in a setting where donors make redistributive transfers to recipients who experience losses. We find that donors tend to reduce their transfers to recipients who are offered insurance, whether or not they take it up. When insurance is rejected by a recipient, transfer reductions are larger for donors who firmly expect that the recipient would take up insurance. The results are consistent with a framework in which the introduction of insurance erodes norms of giving by revealing differences in the extent to which individuals value precautionary behavior with respect to risk-taking. Welfare calculations show that when formal insurance is introduced, the welfare of those who fail to take it up may be reduced.