Insurance contracts when individuals 'greatly value' certainty

In discussing the paradoxical violation of expected utility theory that bears his name, Maurice Allais noted that people tend to “greatly value” certainty. Allais’ observation implies that people will undervalue insurance relative to the predictions of expected utility theory because, as conventionally constructed, insurance offers an uncertain benefit in exchange for a certain cost. Pursuing this logic, we implemented insurance games with cotton farmers in Burkina Faso. On average, farmer willingness to pay for insurance increases significantly when a premium rebate framing is used to render both costs and benefits of insurance uncertain. We show that the impact of the rebate frame on the willingness to pay for insurance is driven by those farmers who exhibit a well-defined discontinuous preference for certainty, a concept that we adapt from the u − v model of utility and measure with a novel behavioral experiment. Given that the potential impacts of insurance for small scale farmers are high, and yet demand for conventionally framed contracts is often low, the insights from this paper suggest welfare-enhancing ways of designing insurance for low-income farmers.