DP10226 Macroinsurance for Microenterprises: A Randomized Experiment in Post-Revolution Egypt

Author(s): David McKenzie
Publication Date: October 2014
Keyword(s): Egypt, insurance, microenterprises, political instability, risk, uncertainty
JEL(s): C93, D22, G22, O12, O16
Programme Areas:
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10226

Firms in many developing countries cite macroeconomic instability and political uncertainty as major constraints to their growth. Economic theory suggests uncertainty can cause firms to delay investments until uncertainty is resolved. We conduct a randomized experiment in post-revolution Egypt to measure the impact of insuring microenterprises against macroeconomic and political uncertainty. Demand for macroeconomic shock insurance was high; 36.7 percent of microentrepreneurs in the treatment group purchased insurance. However, purchasing insurance does not change the likelihood that a business takes a new loan, the size of the loan, or how they invest this loan. We attribute this lack of effect to microenterprises largely investing in inventories and raw materials rather than irreversible investments like equipment. These results suggest that, contrary to what they profess, macroeconomic and political risk is not inhibiting the investment behavior of microenterprises. However, insurance may still be of value to them to help cope with shocks when they do occur, but we are unable to examine this dimension as our insurance product did not pay out over the course of the pilot.