Demand for Complementary Financial and Technological Tools for Managing Drought Risk

36 Pages Posted: 9 Apr 2015

See all articles by Patrick Ward

Patrick Ward

International Food Policy Research Institute (IFPRI)

David J. Spielman

International Food Policy Research Institute (IFPRI)

David Ortega

Michigan State University

Neha Kumar

International Food Policy Research Institute (IFPRI)

Sumedha Minocha

International Food Policy Research Institute (IFPRI)

Date Written: March 23, 2015

Abstract

Weather-related production risks remain one of the most serious constraints to agricultural production in much of the developing world. Financial and technological innovations that mitigate these risks have the potential to greatly benefit farmers in areas prone to such risks. In this study we examine farmers’ preferences for two distinct tools that allow them to manage drought risk: weather index insurance and a recently released drought-tolerant rice variety. We illustrate how these tools can independently address drought risk and demonstrate the potential for these tools to be combined in a complementary risk management product. Using a discrete choice experiment, we assess farmers’ preferences for these two tools independently and in a bundled package. Findings indicate that farmers are generally unwilling to pay for drought-tolerant rice independent of insurance, largely due to the yield penalty under normal conditions. When bundled with insurance, however, farmers’ valuation of the rice increases. Farmers value insurance on its own, but even more so when bundled with the drought-tolerant rice variety. The results provide evidence that farmers value the complementarities inherent in a well-calibrated bundle of risk management tools.

Keywords: Insurance; Risk; finance; rice; Drought; tolerance; Risk management; Weather; Farmers

JEL Classification: D12; Q12; Q14; A16; Q54

Suggested Citation

Ward, Patrick and Spielman, David J. and Ortega, David and Kumar, Neha and Minocha, Sumedha, Demand for Complementary Financial and Technological Tools for Managing Drought Risk (March 23, 2015). IFPRI Discussion Paper 1430, Available at SSRN: https://ssrn.com/abstract=2591563 or http://dx.doi.org/10.2139/ssrn.2591563

Patrick Ward (Contact Author)

International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

HOME PAGE: http://www.ifpri.org

David J. Spielman

International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

David Ortega

Michigan State University ( email )

Agriculture Hall
446 W. Circle Drive
East Lansing, MI 48824
United States

Neha Kumar

International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

Sumedha Minocha

International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

HOME PAGE: http://www.ifpri.org

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