Too Certain to Invest? Public Safety Nets and Insurance Markets in Ethiopia

Researchers' efforts to introduce index insurance in developing countries have met with little demand despite its great potential to help farmers mitigate economic risk. I argue that researchers have overlooked institutional context's critical role in the formation of private markets when designing insurance contracts. Using micro-level evidence from Ethiopia, I show that recipients of a preexisting effective, large-scale public safety net fail to take-up a new highly subsidized private insurance offer. Government safety net programs can decrease demand for private index insurance, forming an additional barrier to index insurance take-up. A direct implication of this research is that policymakers should design private and public insurance products that account for, or even complement, each other.