Hypothetical bias and cognitive ability: Farmers' preference for crop insurance products†

Abstract

The absence of an incentive-compatible mechanism to reveal consumers' true willingness to pay in stated preference elicitation methods and the consequent hypothetical bias are an important concern in discrete choice experiments. Our study extends this discourse on hypothetical bias by examining how it varies with the heterogeneity in respondents' cognitive ability and familiarity with a good. This paper also adds to our understanding of the demand for agricultural insurance in developing countries by studying the willingness to pay for one of the world's largest agricultural insurance programs using a large state representative sample. Following a between-subject design, we implemented a large scale randomized incentivized choice experiment and hypothetical choice experiment with real farmers who make decisions on the purchase of insurance. We find that demand for an insurance product is shaped by the subject's familiarity with and cognitive ability to understand the product. We show that the magnitude of the hypothetical bias is higher at a lower level of cognitive ability and that bias diminishes with an increase in cognitive ability. Finally, we examine key heterogeneity and test a number of possible mechanisms.