nep-mfd New Economics Papers
on Microfinance
Issue of 2015‒01‒19
two papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Making Toilets More Affordable for Cambodia's Poor through Microfinance By World Bank Group
  2. The impact of index-based insurance on informal risk-sharing arrangement By BOUCHER Steve; DELPIERRE Matthieu

  1. By: World Bank Group
    Keywords: Finance and Financial Sector Development - Microfinance Poverty Reduction - Rural Poverty Reduction Water Supply and Sanitation - Urban Water Supply and Sanitation Finance and Financial Sector Development - Bankruptcy and Resolution of Financial Distress Finance and Financial Sector Development - Debt Markets
    Date: 2014–09
  2. By: BOUCHER Steve; DELPIERRE Matthieu
    Abstract: Moral hazard and adverse selection impede the development of formal crop insurance markets in developing countries. Besides, the risk mitigation provided by informal risk-sharing arrangements is restricted by their inability to protect against covariate shocks. In this context, index-based insurance is seen as a promising scheme as it is immune to moral hazard and adverse selection and may offer effective protection against covariate shocks. It would thus seem that the two institutions are ideal complements. Unfortunately, this intuition ignores the potential effects on incentives and behavior generated by the interaction between both schemes. This paper explores this interaction in a model with moral hazard and shows that the formal contract may crowd out informal risk-sharing if it is offered to individuals. Second, we find that both risk-taking and welfare may be reduced by the introduction of index insurance if the premium is set too high. If the formal insurance is offered to the group instead of the individual, the impact on moral hazard is internalized and welfare increases.
    Keywords: Index insurance; Informal risk-sharing; Moral hazard
    JEL: D81 G22 O12 O13
    Date: 2014–12

This nep-mfd issue is ©2015 by Aastha Pudasainee and Olivier Dagnelie. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.