I: "Selling Formal Insurance to the Informally Insured"
The take-up of insurance contracts by farmers in developing countries is puzzlingly
low, but these farmers often participate in informal risk sharing. We examine
theoretically and empirically the impact of informal risk-sharing on the demand for
index insurance, and the effects of index insurance purchase on subsequent risktaking.
In theory, informal risk sharing can crowd out demand for index insurance if
the network indemnifies rainfall risk, but it could also be a complement to index
insurance if the contract carries basis risk (i.e. mismatches between payouts and
actual losses due to the remote location of the rainfall gauge). Using field
experiments that randomize both the location of rainfall gauges and offers of index
insurance contracts to Indian farmers for whom we have detailed data on the nature
and extent of their prior community risk sharing, we find substantial support for the
theoretical predictions. Demand for index insurance is lower with greater basis risk,
but indemnification of household-specific losses by the network mitigates this effect.
Rainfall insurance enables households to take more risk even in the presence of
II: "Risk, Insurance, and Wages in General Equilibrium"
We estimate the general-equilibrium labor market effects of a large-scale randomized intervention
in which we designed and marketed a rainfall index insurance product across three states in India.
Marketing agricultural insurance to both cultivators and to agricultural wage laborers allows us to
test a general-equilibrium model of wage determination in settings where households supplying labor
and households hiring labor face weather risk. Consistent with theoretical predictions, we find that
both labor demand and equilibrium wages become more rainfall sensitive when cultivators are offered
rainfall insurance, because insurance induces cultivators to switch to riskier, higher-yield production
methods. The same insurance contract offered to agricultural laborers smoothes wages across rainfall
states by inducing changes in labor supply. Policy simulations based on our estimates suggest that
selling insurance only to land-owning cultivators and precluding the landless from the insurance market
(which is the current regulatory practice in India and other developing countries), makes wage laborers
worse off relative to a situation where insurance does not exist at all.