Paper
The Social Dilemma of Microinsurance: A Framed Field Experiment on Free-riding and Coordination in Microcredit Groups
Using group insurance to solve the problem of low microinsurance take up
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24 pages
This paper analyzes free-riding and coordination problems in health microinsurance in Tanzania. It uses a framed laboratory experiment in the field to study whether the health insurance decision in microcredit groups entails a social dilemma. Study findings provide a potential solution for low uptake of microinsurance. Health shocks are a major reason for default in microcredit groups in developing countries. Such groups pool risk of individual members since microcredit is typically offered through group-based lending. Jointly liable clients can continue borrowing only if the full group loan is repaid. Findings include:
- Decision to take individual health insurance in jointly liable credit groups is subject to free-riding and coordination failure;
- Less risk averse clients are tempted to free-ride and forgo individual insurance while the more risk averse face a coordination problem;
- Binding nature of group insurance provides a solution to these social dilemmas;
- Health insurance offered at the group level requires a unanimous decision to enroll;
- Group members unwilling to join also bar their fellow group members from insurance, which increases their risk of contributing to peers and the groups default risk;
- Clients can only avoid loan termination with certainty by enrolling themselves.
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