Early-Life Disaster Experience and Insurance Demand: Evidence from the Great Famine in China

Abstract

This study examines the effect of individual early-life famine experiences on insurance demand. Using household-level data from China, we document that household heads’ famine experiences in early adulthood have a causal relationship with the household’s insurance demand. When the famine severity increases by one unit, the probability of the household purchasing insurance rises by 5.8%, the premium expense increases by 45%, and the premium-to-total expenditure ratio increases by 58.8%. The results remain robust when using alternative cohorts and famine severity measures and accounting for migration after the Great Famine. We also conduct two falsification tests to buttress the causal effects of the Great Famine on households’ insurance demand. Finally, we show that the mechanism behind the causative effects is due to the Great Famine-related change in risk preference. After the famine, people became more risk averse and more likely to buy insurance in their later years.JEL: G52, D12, I12