Pitfalls and Potential of Institutional Change: Rain-Index Insurance and the Sustainability of Rangeland Management

Abstract

Rain-index insurance is strongly advocated in many parts of the developing world to help farmers coping with climatic risk that prevails in (semi-)arid rangelands due to low and highly uncertain rainfall. We present a modeling analysis of how the availability of rain-index insurance affects the sustainability of rangeland management. We show that a rain-index insurance with frequent payoffs, i.e. a high strike level, leads to the choice of less sustainable grazing management than without insurance available. However, a rain-index insurance with a low to medium strike level enhances the farmer's well-being while not impairing the sustainability of rangeland management.

Keywords: ecological-economic modeling, weather-index insurance, Namibia, grazing management, risk, sustainability, weather-based derivatives

JEL Classification: D81, G22, Q14, Q56, Q57