Impact of Rainfall Insurance on Farmer Behavior in India

2009-05-01

2009-11-30

Main experiment:

Cumulative "index" rainfall for each policy relative to cumulative total rainfall

Agricultural investment decisions during treatment period

Local average treatment effect of insurance treatment on agricultural investments during treatment period

Average treatment effect estimates for cash crops by individual input type



Willingness-to-pay experiment:

Average bid for each insurance policy

Farmer willingness to pay for each insurance policy

The goal of this project was to study how access to an innovative retail risk management instrument influences "real" production decisions. A randomized control trial approach was employed in which rainfall insurance was randomized across small agricultural firms in a semi-arid region of India in which rainfall variability during the monsoon is the primary source of production and income risk. At the start of the monsoon, the treatment group consisting of half of the farmers in the sample was provided with rainfall insurance policies, mitigating their exposure to rainfall risk. The control group was instead promised a fixed cash payment equal to an estimate of the actuarial value of the insurance policy, to be paid at the same time as insurance payouts. This compensation was offered to ensure that differences in behavior between the insurance and control group would be do to the state-contingent nature of the insurance, rather than any wealth effects arising from the expected value of the insurance. After the growing season, a follow-up survey was conducted of each household which collected demographic data, information on livestock, financial assets (including savings, loans, and insurance), agricultural investments and production decisions during the monsoon, and attitudes towards and expectations of weather and insurance payout, and risk-coping behavior.

The project also involved a follow-up experiment which sought to understand how consumers value these complex insurance products and to provide insight into their long-run commercial viability. An interviewer would visit each household after the first experiment and offer the chance to participate in a game in which they would have the opportunity to purchase rainfall insurance policies at a discounted price. The subject would have a chance to study the details of several insurance policies, and then record, in rupees, their willingness to pay for it. Only one of these policies would in fact be available for sale, and would be revealed only after the subject had stated willingness to pay for all policies. If the subject's bid were greater than or equal to the offer price, the subject would purchase the policy. If the subject's bid was less than the offer price, no insurance policy would be sold.

The sample consisted of 1,479 small agricultural firms (usually consisting of a single family) drawn from 45 villages in two districts in Andhra Pradesh, Mahbubnagar, and Anantapur. Two thirds of the sample had participated in previous research conducted by the same researchers on rainfall insurance. They were originally selected via a stratified random sample of land-owning farms in 37 study villages in 2004. In 2009, to improve statistical power for this study, an additional 500 households were drawn from these 37 villages as well as 8 nearby villages.

individuals (representing each agricultural firm/household)

Yes

(regression results clustered at individual level, so same as number of observations)

Main experiment: 1,479 farmers Willingness-to-pay experiment: 1,978 farmers comprising 1,464 participants from the main experiment, as well as 514 new subjects randomly selected from the same and nearby villages.

Main experiment: 50% of farmers treatment, 50% of farmers control

Weather is a key source of income risk, especially in emerging market economies. This paper uses a randomized controlled trial involving Indian farmers to study how an innovative rainfall insurance product affects production decisions. We find that insurance provision induces farmers to invest more in higher-return but rainfall-sensitive cash crops, particularly among educated farmers. This shift in behavior occurs ex ante, when realized monsoon rainfall is still uncertain. Our results suggest that financial innovation can mitigate the real effects of uninsured production risk.

Cole, Shawn, Xavier Gine, and James Vickery. "How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment." Review of Financial Studies

http://documents.worldbank.org/curated/en/285431468330274651/How-does-risk-management-influence-production-decisions-evidence-from-a-field-experiment

Weather is a key source of income risk for many firms and households,
particularly in emerging market economies. This paper studies how an
innovative risk management instrument for hedging rainfall risk affects
production decisions among a sample of Indian agricultural firms,
using a randomized controlled trial approach. We find that the
provision of insurance induces farmers to shift production towards
higher-return but higher-risk cash crops, particularly amongst moreeducated
farmers. Our results support the view that financial innovation
may help mitigate the real effects of uninsured production risk. In a
second experiment we elicit willingness to pay for insurance policies
that differ in their contract terms, using the Becker-DeGroot-Marshak
mechanism. Willingness-to-pay is increasing in the actuarial value of
the insurance, but substantially less than one-for-one, suggesting that
farmers’ valuations are inconsistent with a fully rational benchmark.

Cole, Shawn, Xavier Gine, and James Vickery. "How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment." Harvard Business School Working Paper, March 25, 2013.

https://www.povertyactionlab.org/sites/default/files/publications/751%20-%20How%20Does%20Risk%20Management%20Influence%20Production%20Decisions.pdf