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Monday, February 6, 2012

The Social Network Effect on Insurance Take-up

From one of the job candidates who presented here, Jing Cai from Berkeley. Her puzzle: why is there sub-optimal take-up on weather insurance products in rural China, despite heavy government subsidies? Well maybe because friends are not using it:
Using data from a two-year randomized experiment in rural China, this paper studies the influence of social networks on the decision to adopt a new weather insurance product and the mechanisms through which social networks operate. In the first year, I provided financial education to a random subset of farmers and found a large social network effect on insurance take-up: for untreated farmers, having an additional friend receiving financial education raises take-up by almost half as much as obtaining financial education directly, a spillover effect equivalent to offering a 12% reduction in the average insurance premium. By varying the information available to subjects about their peers’ take-up decisions and using randomized default options, I show that the positive social network effect is not driven by scale effects, imitation, or informal risk-sharing, but instead by the diffusion of insurance knowledge. One year later, social networks continue to affect insurance demand: observing an above-median share of friends receiving payouts increases insurance take-up at a rate equivalent to about 50% of the impact of receiving payouts directly. I also find that social network effects are larger in villages where households are more strongly connected, and when the people who receive financial education first are more central in the social network.
Of all the job talks I've attended so far, her paper is my favorite. It's crazy grad students these days are able to manage such projects of large scale. She randomized between 185 villages, and then between 5300 households within villages, and then some. Impressive. I can only imagine the logistical headache that must have been.

I take pleasure in attending these job talks. It's a rare opportunity to see everyone, the whole faculty, in one room, in full form. But scouting the competition from other schools is beneficial as well. I myself would need to do a job talk someday. And if you've ever been in one, it's not for the faint hearted, especially when the claws of the economics faculty are out.

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