Does Index Insurance Crowd In or Crowd Out Informal Risk Sharing? Evidence from Rural Ethiopia

Abstract We study how the introduction of a formal index insurance product affects informal risk‐sharing among pastoralists in southern Ethiopia. Using detailed social networks data, randomized incentives to purchase the insurance product, and hypothetical informal transfer data that mirror the existing customary arrangements, we find respondents’ own formal insurance uptake has no significant effect on their willingness to share risk through customary institutions. We also find weak evidence that a randomly matched peer's insurance uptake positively influences respondents’ willingness to make informal transfers to that match. Overall, our results imply that in this context index insurance does not crowd out informal risk‐sharing mediated by social networks.