How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment

55 Pages Posted: 11 Oct 2014

See all articles by Shawn Allen Cole

Shawn Allen Cole

Harvard Business School

Xavier Giné

World Bank - Development Research Group (DECRG)

James I. Vickery

Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2014

Abstract

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

Cole, Shawn Allen and Gine, Xavier and Vickery, James Ian, How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment (September 1, 2014). FRB of New York Staff Report No. 692, Available at SSRN: https://ssrn.com/abstract=2507978 or http://dx.doi.org/10.2139/ssrn.2507978

Shawn Allen Cole

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Xavier Gine

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

HOME PAGE: https://sites.google.com/site/decrgxaviergine/

James Ian Vickery (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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