| By: |
Hill, Ruth Vargas;
Kumar, Neha;
Magnan, Nicholas;
Makhija, Simrin;
de Nicola, Francesca;
Spielman, David J.;
Ward, Patrick S. |
| Abstract: |
It is widely acknowledged that unmitigated risks provide a disincentive for
otherwise optimal investments in modern farm inputs. Index insurance provides
a means for managing risk without the burdens of asymmetric information and
high transaction costs that plague traditional indemnity-based crop insurance
programs. Yet many index insurance programs that have been piloted around the
world have met with rather limited success, so the potential for insurance to
foster more intensive agricultural production has yet to be realized. This
study assesses both the demand for and the effectiveness of an innovative
index insurance product designed to help smallholder farmers in Bangladesh
manage risk to crop yields and the increased production costs associated with
drought. Villages were randomized into either an insurance treatment or a
comparison group, and discounts and rebates were randomly allocated across
treatment villages to encourage insurance take-up and to allow for the
estimation of the price elasticity of insurance demand. Among those offered
insurance, we find insurance demand to be moderately price elastic, with
discounts significantly more successful in stimulating demand than rebates.
Farmers who are highly risk averse or sensitive to basis risk prefer a rebate
to a discount, suggesting that the rebate may partially offset some of the
implicit costs associated with insurance contract nonperformance. Having
insurance yields both ex ante risk management effects and ex post income
effects on agricultural input use. The risk management effects lead to
increased expenditures on inputs during the aman rice-growing season,
including expenditures for risky inputs such as fertilizers, as well as those
for irrigation and pesticides. The income effects lead to increased seed
expenditures during the boro rice-growing season, which may signal insured
farmers’ higher rates of seed replacement, which broadens their access to
technological improvements embodied in newer seeds as well as enhancing the
genetic purity of cultivated seeds. |
| Keywords: |
agriculture; investment; risk management; insurance; risk; weather hazards; drought; weather; climate; price elasticities; price formation; inputs; farm inputs; fertilizers; irrigation; pesticides; crops; yields; smallholders, index insurance; risk and uncertainty, O12 Microeconomic Analyses of Economic Development; O13 Economic Development: Agriculture, Natural Resources, Energy, Environment, Other Primary Product; Q12 Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets; G22 Insurance, Insurance Companies, Actuarial Studies, |
| Date: |
2017 |
| URL: |
http://d.repec.org/n?u=RePEc:fpr:ifprid:1630&r=mfd |