Formal Rainfall Insurance for the Informally Insured in India

Last registered on August 17, 2016
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Pre-Trial

Trial Information

General Information

Title
Formal Rainfall Insurance for the Informally Insured in India
RCT ID
AEARCTR-0001478
Initial registration date
August 17, 2016

Initial registration date is when the trial was registered.

It corresponds to when the registration was submitted to the Registry to be reviewed for publication.

First published
August 17, 2016, 2:24 PM EDT

First published corresponds to when the trial was first made public on the Registry after being reviewed.

Locations

Country
India
Region
South Asia

Primary Investigator

Name
Ahmed Mobarak
Affiliation
Yale University
Contact Primary Investigator

Other Primary Investigator(s)

PI Name
Mark Rosenzweig
PI Affiliation
Yale University
Contact Investigator

Additional Trial Information

Status
Completed
Start date
2010-09-01
End date
2011-07-31
Keywords
Agriculture
Additional Keywords
rainfall, insurance
JEL code(s)
O17, O13, O16
Secondary IDs
Abstract
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
informal insurance.


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.
External Link(s)
J-PAL Evaluation Summary

Registration Citation

Citation
Mobarak, Ahmed and Mark Rosenzweig. 2016. "Formal Rainfall Insurance for the Informally Insured in India." AEA RCT Registry. August 17. https://doi.org/10.1257/rct.1478-1.0
Former Citation
Mobarak, Ahmed and Mark Rosenzweig. 2016. "Formal Rainfall Insurance for the Informally Insured in India." AEA RCT Registry. August 17. https://www.socialscienceregistry.org/trials/1478/history/10167
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Experimental Details

Interventions

Intervention(s)
Intervention (Hidden)
Intervention Start Date
2010-10-01
Intervention End Date
2011-07-31

Primary Outcomes

Primary Outcomes (end points)
Determinants of Receiving Financial Assistance


Effects of basis risk on log of output value per acre


Determinants of Formal Insurance Take-up


Marginal Effects of Reasons for not Purchasing Insurance


Intent-to-Treat Caste Fixed-Effects Estimates of Index Insurance on Risk and Yield:
Proportion of Planted Crop Varieties Rated "Good" for Drought Tolerance and Yield,
Tamil Nadu Kharif Rice Farmers


Reasons for Not Purchasing Insurance


Village Fixed Effects Estimates: Demand for Kharif Season Labor by
Cultivators by Stage of Production


Village Fixed Effects Estimates: Labor Supply and Migration during Kharif
Season by Landless Agricultural Wage Workers Aged 25 - 49


General Equilibrium Effects of Insurance Provision and Rainfall on Log Wages (Landless Agricultural Wage Workers Ages 20+)


Primary Outcomes (explanation)

Secondary Outcomes

Secondary Outcomes (end points)
Secondary Outcomes (explanation)

Experimental Design

Experimental Design
A randomized controlled trial was conducted in order to empirically examine the relationship between the demand for rainfall index insurance. the level of informal community-based risk mitigation, and basis risk. Index insurance was marketed to a sample of jati (Indian sub-caste) members. Researchers first studied how informal risk sharing affects formal insurance take-up, and then how the random offer of index insurance (intent-to-treat) affects subsequent risk-taking. In addition to randomizing the offer of and price of the index product, automatic rainfall stations were randomly placed in a subset of the sampled villages. Contract payouts were based on rainfall measured at these stations, so a household's distance from a rainfall station is a major determinant of basis risk. The existence of basis risk in the sample was shown by estimating the relationship between the rainfall recorded at the stations and individual farmer's per-acre output. The distance variation was used to directly estimate both the effect of basis risk on index insurance demand, and whether jati-based idiosyncratic risk sharing attenuates the negative effects of basis risk on formal insurance demand.
Experimental Design Details
Randomization Method
The sampling frame for the marketing experiment was listing
households in all 63 REDS villages in three large states: Uttar Pradesh (UP), Andhra Pradesh (AP)
and Tamil Nadu (TN). Researchers randomly selected 42 of these villages for the marketing experiment,
while the 21 other villages were assigned to a control group so as to preserve an unadulterated
comparison sample for the analysis of the effects of being offered formal insurance on subsequent
risk-taking.

The experiment sampling frame was restricted to only castes that have 50 or more households
represented in the REDS listing.

Researchers randomly selected 5,100 of these households to receive insurance marketing treatments, stratified by type of
occupation: ~300 households in occupations entirely unrelated to agriculture, ~2400 cultivator
households, and ~2400 agricultural laborer households. Researchers were ultimately able to market the
insurance product to 4,667 rural households in TN, AP and UP.

(See section c.1 Sample Selection in "Selling Formal Insurance to the Informally Insured" for more information)
Randomization Unit
Treatment was clustered on the village level.



Calculations for all outcomes featured clustering on the caste level, except for "Testing for basis risk: effects on log of output value per acre" in which clustering occurred at the village level.
Was the treatment clustered?
Yes

Experiment Characteristics

Sample size: planned number of clusters
63 villages
Sample size: planned number of observations
5,100 households were selected from the treatment villages to receive marketing treatments.
Sample size (or number of clusters) by treatment arms
42 villages treatment

21 villages control
Minimum detectable effect size for main outcomes (accounting for sample design and clustering)
Supporting Documents and Materials
IRB

Institutional Review Boards (IRBs)

IRB Name
IRB Approval Date
IRB Approval Number
Analysis Plan

Post-Trial

Post Trial Information

Study Withdrawal

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Intervention

Is the intervention completed?
Yes
Intervention Completion Date
July 31, 2011, 12:00 +00:00
Data Collection Complete
Yes
Data Collection Completion Date
July 31, 2011, 12:00 +00:00
Final Sample Size: Number of Clusters (Unit of Randomization)
(same as initial)
Was attrition correlated with treatment status?
No
Final Sample Size: Total Number of Observations
Researchers were ultimately able to market the
insurance product to 4,667 households in the treatment villages.
Final Sample Size (or Number of Clusters) by Treatment Arms
(same as initial)
Data Publication

Data Publication

Is public data available?
No

Program Files

Program Files
No
Reports, Papers & Other Materials

Relevant Paper(s)

Abstract
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
informal insurance.
Citation
A. Mushfiq Mobarak and Mark Rosenzweig. "Selling Formal Insurance to the Informally Insured." 2012
URL
https://www.povertyactionlab.org/sites/default/files/publications/300_400%20Formal%20Insurance%20Nov2012.pdf
Abstract
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.
Citation
Mobarak, Ahmed Mushfiq, and Mark Rosenzweig. "Risk, Insurance and Wages in General Equilibrium." NBER Working Paper 19811, January 2014.
URL
https://www.povertyactionlab.org/sites/default/files/publications/300_400%20Wages%20General%20Equilibrium%20NBER%20Jan2014.pdf

Reports & Other Materials