Hyuk Son (Utrecht University): “Long-run Effects of Catastrophic Drought Insurance"

Abstract:
Aggregate shocks such as droughts, floods, and natural disasters threaten households' short-run consumption and long-run human capital accumulation. Formal insurance against aggregate shocks may offer a promising tool to mitigate these negative consequences. We study the long-run impacts of catastrophic drought insurance -- first introduced in 2011 -- on income, assets, productive strategies, and human capital accumulation among pastoralists in the Arid and Semi-Arid Lands in Kenya and Ethiopia. We leverage randomized insurance premium discounts to estimate the Local Average Treatment Effect of insurance purchase on outcomes measured in a panel survey with follow-up conducted 10 years later. We show that the insurance changed productive strategies and induced an 83%reduction in the share of small animals (vs. large animals) herded. Furthermore, we observe a substantial increase – from~5% to ~20%– in the share of household members that have completed age-appropriate education. We demonstrate that these effects arise from initial insurance coverage, not the receipt of indemnity payments. This suggests that reducedex anterisk exposure and the behavioral change it induces -- not the cash transfers resulting from the claim payment -- generate the long-run effects we observe.