The willingness to pay for flood insurance in mekong river delta

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UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ERASMUS UNVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS WILLINGNESS TO PAY FOR FLOOD INSURANCE IN THE MEKONG RIVER DELTA BY NGUYEN NGOC QUE ANH MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, SEPTEMBER 2016 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS WILLINGNESS TO PAY FOR FLOOD INSURANCE IN THE MEKONG RIVER DELTA A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN NGOC QUE ANH Academic Supervisor: TRUONG DANG THUY HO CHI MINH CITY, September 2016 DECLARATION In order to fulfill the requirements for the degree of Master of Art in Development Economics to Vietnam – The Netherlands Programme (VNP), this thesis entitled “Willingness to pay for Flood Insurance in the Mekong River Delta” is submitted This declaration certify that this thesis constitutes on my original work only All materials used in this thesis have been acknowledged and cited properly following the Programme’s standards NGUYEN NGOC QUE ANH ACKNOWLEDGMENTS Doing thesis is an amazing adventure but it is also a tough path, without support and encouragement of my family, my teachers, my friends and Vietnam Netherland Program, I might not complete it I would like to send my sincerest thanks and gratitude to my supervisor - Dr Truong Dang Thuy who always gives me invaluable advice and instructs me wholeheartedly From the initial ideas to finish, he is very patient, listens to my opinions and helps me to correct mistakes delicately I am deeply grateful to Mr Phung Thanh Binh Many thanks for giving me the precious opportunity to join in this research, inspiring me and allowing me to employ the data, so that I can pursue this topic Memories and experience from this research will be unforgettable I greatly appreciate the enthusiasm and kindness of lecturers and staffs of Vietnam Netherland Program I would like to thank my teachers, the founders and staffs of VNP for be willing to help and give me invaluable knowledge Last but not least, I am very thankful that my family and my friends are always with me, love me and support me wholeheartedly From the bottom of my heart, I would send my sincerest gratitude to my parents Without their love, this thesis would be not accomplished NGUYEN NGOC QUE ANH ABSTRACT In the circumstance of climate change and series of dams built in Mekong River Basin, risk of flood damages and productivity loss in Mekong River Delta tend to be ambiguous and unpredictable Choice experiment is applied to assess the stated preference and the willingness to pay for flood insurance of local farmers Based on the data obtained from survey in Mekong River Delta, we consider the impacts of attributes on the utility of insurance buyer and the willingness to pay of them As a result, flood insurance attributes except deductible have impact on utility of farmers and the willingness to pay for flood insurance of them Especially, buying the flood insurance provided by corporation will raise the utility and willingness to pay of local farmer Since the deductible have no impact on the utility of flood insurance buyers, local farmers are willing to share the burden with providers When the effects of challenges for flood insurance development are controlled, only provider and policy types have strong positive impact on utility of insurance Based on the estimate result, WTP for attributes and the WTP for specific insurance package are calculated carefully, we also evaluate the probability of levels of WTP for flood insurance with different levels of important attributes The potential development of insurance companies are very bright, especially corporation The profitability will be large, if the provider provide insurance packages with favorite policy When premium of the most preferred flood insurance vary from 5,000 (VND/1000𝑚2 / Farming season) to 200,000 (VND/1000𝑚2 / Farming season), 90 percent to 79 percent of farmer willing to pay it JEL Classification: Q11, Q12, Q14 Keywords: Willingness to pay, Flood insurance, Mekong River Delta, Random Utility Model i TABLE OF CONTENT ABSTRACT i ABBREVIATIONS vi LIST OF FIGURES vii LIST OF TABLES ix CHAPTER INTRODUCTION 1.1 Problem statement 1.2 Research objectives 1.3 Scope of the study 1.4 Structure of this thesis CHAPTER LITERATURE REVIEW 2.1 Previous studies without using RUM 2.1.1 Researches on agricultural insurance using secondary data or combine with primary data 2.1.2 Researches not applying RUM on agricultural insurance using primary data 2.2 Random utility model (RUM) and applications 11 2.2.1 Random utility model (RUM) 11 2.2.2 Researches applying RUM on agricultural insurance 13 2.2.3 Review of flood insurance demand research using RUM 18 2.3 Challenges of disaster insurance market 21 ii 2.3.1 The ambiguity 21 2.3.2 Adverse selection 23 2.3.3 Charity hazard 25 CHAPTER RESEARCH METHODOLOGY 28 3.1 Demand for flood insurance 28 3.2 The advantages of Choice Experiment compared to Contingent Value Method 28 3.3 General model 29 3.4 Estimation 30 3.4.1 Exogenous sample 30 3.4.2 Estimation on Subset of Alternatives 33 3.5 Description of variables 35 3.5.1 Description of all attributes and levels 35 3.5.2 Description of variables used to capture challenges for flood insurance market development 37 3.6 Empirical models 42 3.6.1 Empirical model with only attribute variables 42 3.6.2 Empirical model with attribute variables and their interaction with non-attribute variables 43 3.7 Calculation of Willingness-to-Pay (WTP) for specific insurance packages, and probability of buying specify insurance packages with the changes in premium 44 3.7.1 Calculation of Willingness to Pay (WTP) for each attribute and for specific insurance packages 44 3.7.2 Probability of buying specify insurance packages with changes in premium levels 47 3.8 Data collection 47 iii CHAPTER RESEARCH RESULTS 50 4.1 Descriptive statistics 50 4.2 Bivariate analysis 56 4.2.1 No selection without consideration 56 4.2.2 Bivariate analysis about the effects of personal perspectives and externalities on flood insurance purchasing decision 57 4.3 Empirical results 59 4.3.1 Estimation results 59 4.3.2 The willingness to pay (WTP) 67 4.3.3 The probability of willingness to pay of most preferred insurance packages 73 CHAPTER CONCLUSION 80 5.1 Conclusion remark 80 5.2 Policy implications 82 5.3 Limitations 82 REFERENCES 84 APPENDIX 92 APPENDIX A: Questions are used from the survey 92 APPENDIX B: Conceptual Framework 94 Appendix C: The statistic results about impacts of challenges 95 Appendix D: The variation of WTP for flood insurance probability, with difference levels of cover 100 iv Appendix E: The variation of WTP for flood insurance probability, with difference levels of deductible rate 101 Appendix F: the regression result of models controlling the impacts of challenges and household characteristics 102 Appendix G: The regression result in Stata of models 104 Appendix H: The regression result from applying Nested Logit Model in Stata 108 v ABBREVIATIONS BDT Bangladeshi Taka CE Choice Experiment CLL Conditional Log Likelihood Function CVM Contingent Value Method GIS Geographic Information System IFRC International Federation Red Cross IPCC The Intergovernmental Panel on Climate Change LL Log Likelihood Function MRD Mekong River Delta MRC Mekong River Commission OLS Ordinary Least Squares RUM Random Utility Model VND The Vietnamese Dong USD The United States Dollar WTP Willingness to Pay vi Appendix C: The statistic results about impacts of challenges Vulnerability 96 Irrigation Improvement 97 Accessibility to pumping station 98 Fear 99 Charity hazard 100 Appendix D: The variation of WTP for flood insurance probability, with difference levels of cover Table: With different levels of coverage, the probability of WTP for flood insurance packages Table: The probability of WTP, when the challenges are controlled 101 Appendix E: The variation of WTP for flood insurance probability, with difference levels of deductible rate Table: With different levels of deductibles, the probability of WTP for flood insurance packages Table: the probability of WTP, when the challenges are controlled 102 Appendix F: the regression result of models controlling the impacts of challenges and household characteristics Variables Policy Flood Flood&Innudation Flood&Windstorm Flood&Innudation&Windstorm Provider Corporation Foreign Deductibles (%) Cover (VND/1000𝑚2 / Farming season) Premium (VND/1000𝑚2 / Farming season) Premium.charityhazard (VND/1000𝑚2 / Farming season) Policy1 Charityhazard Policy2 charityhazard Policy3 charityhazard Policy4 charityhazard Premium.Fear (VND/1000𝑚2 / Farming season) Policy1.Fear Policy2.Fear Conditional Logit Model Only observations having All observations consistent answer Model Model Model Model -1.291 (0.833) 0.830 (0.734) -0.569 (0.713) 0.377 (0.781) -1.300 (0.834) 0.840 (0.734) -0.570 (0.714) 0.381 (0.780) -1.713 (1.164) 0.987 (1.031) -1.345 (1.020) -0.369 (1.113) -1.664 (1.170) 0.954 (1.036) -1.333 (1.025) -0.397 (1.118) 1.127*** (0.0997) -0.104 (0.107) -0.842 (0.576) 1.31e-07** (5.58e-08) -1.61e-05 (1.38e-05) 1.127*** (0.0998) -0.103 (0.107) -0.843 (0.577) 1.31e-07** (5.59e-08) -7.75e-06 (1.60e-05) 1.220*** (0.134) -0.0784 (0.148) -0.725 (0.785) 1.92e-07** (7.61e-08) 2.38e-06 (1.93e-05) 1.225*** (0.134) -0.0753 (0.148) -0.695 (0.786) 1.93e-07** (7.62e-08) -1.58e-05 (2.31e-05) 1.33e-06 (7.98e-06) 1.133** (0.479) 0.490 (0.416) 0.941** (0.406) 0.750* (0.434) -6.29e-06 (8.78e-06) 0.434 (0.526) 0.109 (0.476) 2.21e-06 (8.04e-06) 1.127** (0.479) 0.481 (0.416) 0.941** (0.406) 0.752* (0.434) -6.13e-06 (8.80e-06) 0.431 (0.527) 0.0926 (0.477) 1.84e-05 (1.14e-05) 1.534** (0.705) 0.523 (0.561) 1.411** (0.563) 0.987 (0.609) -2.04e-05* (1.16e-05) 1.355* (0.713) 0.672 (0.631) 1.60e-05 (1.16e-05) 1.541** (0.705) 0.571 (0.563) 1.423** (0.563) 1.011* (0.611) -2.06e-05* (1.16e-05) 1.348* (0.710) 0.736 (0.631) 103 Policy3.Fear Policy4.Fear 0.353 (0.477) -0.361 (0.492) Premium.Vulnerability (VND/1000𝑚2 / Farming season) Policy1.Vulnerability Policy2.Vulnerability Policy3.Vulnerability Policy4.Vulnerability Premium.Irrigation (VND/1000𝑚2 / Farming season) Policy1.Irrigation Policy2.Irrigation Policy3.Irrigation Policy4.Irrigation Premium.Pumpingstation (VND/1000𝑚2 / Farming season) Policy1.Pumpingstation Policy2.Pumpingstation Policy3.Pumpingstation Policy4.Pumpingstation Premium.Totalincome -5.78e-06 (8.65e-06) 1.728*** (0.502) 1.282*** (0.433) 1.674*** (0.433) 1.952*** (0.440) 5.65e-06 (6.54e-06) -0.532 (0.387) -0.784** (0.370) -0.276 (0.356) -0.0823 (0.385) 1.64e-05** (7.27e-06) -1.370*** (0.447) -1.277*** (0.413) -1.139*** (0.406) -1.131** (0.442) (0) Premium.Age Premium.Familymembers No Obs LR Chi-sq 4,050 654.57 104 0.342 (0.478) -0.374 (0.492) 1.008 (0.642) 0.341 (0.639) 1.025 (0.639) 0.387 (0.642) -5.81e-06 (8.65e-06) 1.741*** (0.503) 1.280*** (0.433) 1.681*** (0.433) 1.954*** (0.440) -1.54e-05 (1.08e-05) 1.709*** (0.656) 1.137** (0.552) 1.777*** (0.563) 1.983*** (0.563) -1.64e-05 (1.09e-05) 1.672** (0.657) 1.118** (0.553) 1.770*** (0.563) 1.979*** (0.564) 6.17e-06 (6.57e-06) -0.532 (0.387) -0.786** (0.370) -0.276 (0.356) -0.0815 (0.385) 1.59e-05** (7.29e-06) -1.363*** (0.447) -1.260*** (0.413) -1.134*** (0.405) -1.126** (0.442) (0) -1.32e-07 (1.47e-07) -7.19e-07 (1.26e-06) 2.02e-06 (8.62e-06) -0.518 (0.535) -0.426 (0.493) 0.0217 (0.484) 0.370 (0.523) 2.54e-06 (9.71e-06) -2.061*** (0.732) -1.940*** (0.670) -1.546** (0.660) -1.269* (0.706) (0) 1.26e-07 (8.81e-06) -0.524 (0.537) -0.430 (0.493) 0.0204 (0.485) 0.374 (0.523) 5.90e-06 (1.01e-05) -2.069*** (0.735) -1.984*** (0.673) -1.576** (0.664) -1.301* (0.709) (0) 2.39e-07 (2.25e-07) 2.06e-06 (1.87e-06) 4,050 655.64 2,340 492.63 2,340 491.71 Appendix G: The regression result in Stata of models Figure: The regression result of basic model based on the whole sample 105 Figure: The regression result of basic model based on the whole sample with the impact of challenges for the development of flood insurance market 106 Figure: The regression result of basic model based on the sample of observations whose tastes are consistent 107 Figure: The regression result of basic model based on the whole sample with the impact of challenges for the development of flood insurance market 108 Appendix H: The regression result are obtained from applying Nested Logit Model in Stata 109 110 ... MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS WILLINGNESS TO PAY FOR FLOOD INSURANCE IN THE MEKONG RIVER. .. conducted to capture the demand of flood insurance in Mekong River Delta Overall, facilitating the disaster insurance sector in developing countries like Vietnam is necessary The information about the. .. buyer and the willingness to pay of them As a result, flood insurance attributes except deductible have impact on utility of farmers and the willingness to pay for flood insurance of them Especially,
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