The role of bounded rationality and heuristic decision making for the understanding of the weak development of weather-index insurance market in agriculture

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Weather-index insurances are innovative risk management instruments that compared to conventional insurances cause low administration and regulation costs and are not accompanied by moral hazard or adverse selection problems. Despite these advantages, farmers make little use of weather-index insurances as yet. With this in mind, the present research project focuses on the question if bounded rationality provides an eventual explanation for the missing willingness to adopt this type of insurance. For lack of a natural experiment, an extra-laboratory experiment is carried out in the form of a multi-period, single-person business simulation game with a target sample size of 240 farmers. Two major questions are to be answered: first, does the demand for weather-index insurances change if the participants are not only informed about the total insurance premium but also about the loading? Second, does demand change in a framing where participants are told that the (unchanged loading) is the result of a subsidized insurance offer?