Weather Insurance Savings Accounts.

Better insurance against rainfall risk could improve the security of hundreds of millions of agricultural households around the world. This paper theoretically and experimentally analyses an innovative financial product called a Weather Insurance Savings Account (WISA), which combines savings and rainfall insurance. We index the insurance share of the WISA by γ ϵ [0, 1] and use a standard model of intertemporal insurance demand to study preferences over γ . We then use a laboratory experiment to elicit participants' valuations of pure insurance, pure savings, and intermediate WISA types. Contrary to the standard model, within-subject comparisons show that many participants prefer both pure insurance and pure savings to any interior mixture of the two. Additional experimental and observational evidence distinguishes between several alternative explanations. One possibility that survives our additional tests is diminishing sensitivity to losses, as in prospect theory. [ABSTRACT FROM AUTHOR]