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Long-run effects of catastrophic drought insurance

Aggregate shocks such as droughts, floods, and natural disasters threaten households’ long-run human capital accumulation. Formal insurance against aggregate shocks may offer a promising tool to mitigate these negative consequences. We study the long-run impacts of catastrophic drought insurance – first introduced in 2010 – on income, assets, production strategies, and human capital accumulation among pastoralists in Kenya and Ethiopia. We leverage randomized insurance premium discounts to estimate the Local Average Treatment Effect of insurance purchase on outcomes measured in a panel survey with follow-up conducted 10 years later.

Insurance changed production strategies, inducing an 83 percent reduction in the share of small animals (vs. large animals) herded. Furthermore, we observe a substantial increase– from ∼ 5 percent to ∼ 20 percent – in the share of household members who completed age-appropriate education.

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