How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment
55 Pages Posted: 11 Oct 2014
Date Written: September 1, 2014
Weather is a key source of income risk, particularly in emerging market economies. This paper uses a randomized controlled trial involving a sample of Indian farmers to study how an innovative rainfall insurance product affects production decisions. We find that insurance provision induces farmers — particularly educated farmers — to shift production toward higher-return but higher-risk cash crops. Our results support the view that financial innovation can mitigate the real effects of uninsured production risk. Addressing the puzzle of low adoption, we show that payouts improve trust in the product and that farmers shield payouts from claims by relatives.
Keywords: risk management, financial constraints
JEL Classification: G22, G32
Suggested Citation: Suggested Citation