Risk, Insurance and Wages in General Equilibrium

49 Pages Posted: 2 Jun 2014

See all articles by Ahmed Mushfiq Mobarak

Ahmed Mushfiq Mobarak

Yale School of Management; Yale University - Cowles Foundation

Mark R. Rosenzweig

Yale University - Economic Growth Center; Yale University - Cowles Foundation

Multiple version iconThere are 3 versions of this paper

Date Written: January 2014

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. The general-equilibrium analysis reveals that the welfare costs of current regulation are borne by landless laborers, who represent the poorest segment of society and whose risk management options are the most limited.

Keywords: Agricultural Wages, General Equilibrium Effects, Index Insurance

JEL Classification: O13, O16

Suggested Citation

Mobarak, Ahmed Mushfiq and Rosenzweig, Mark Richard, Risk, Insurance and Wages in General Equilibrium (January 2014). CEPR Discussion Paper No. DP9797. Available at SSRN: https://ssrn.com/abstract=2444796

Ahmed Mushfiq Mobarak (Contact Author)

Yale School of Management ( email )

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203-432-5787 (Phone)

HOME PAGE: http://mba.yale.edu/faculty/profiles/mobarak.shtml

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Mark Richard Rosenzweig

Yale University - Economic Growth Center ( email )

Box 208269
New Haven, CT 06520-8269
United States
203-432-3620 (Phone)

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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