The Social Dilemma of Microinsurance: A Framed Field Experiment on Free-riding and Coordination in Microcredit Groups

This paper analyzes free-riding and coordination problems in health microinsurance in Tanzania. It uses a framed laboratory experiment in the field to study whether the health insurance decision in microcredit groups entails a social dilemma. Study findings provide a potential solution for low uptake of microinsurance. Health shocks are a major reason for default in microcredit groups in developing countries. Such groups pool risk of individual members since microcredit is typically offered through group-based lending. Jointly liable clients can continue borrowing only if the full group loan is repaid. Findings include:

• Decision to take individual health insurance in jointly liable credit groups is subject to free-riding and coordination failure;
• Less risk averse clients are tempted to free-ride and forgo individual insurance while the more risk averse face a coordination problem;
• Binding nature of group insurance provides a solution to these social dilemmas;
• Health insurance offered at the group level requires a unanimous decision to enroll;
• Group members unwilling to join also bar their fellow group members from insurance, which increases their risk of contributing to peers and the groups default risk;
• Clients can only avoid loan termination with certainty by enrolling themselves.