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How does risk management influence production decisions? evidence from a field experiment
 
Author:Cole, Shawn; Gine, Xavier; Vickery, James; Collection Title:Policy Research working paper ; no. WPS 6546Impact Evaluation series ; no. IE 100
Country:World; Date Stored:2013/07/24
Document Date:2013/07/01Document Type:Policy Research Working Paper
SubTopics:Non Bank Financial Institutions; Climate Change Economics; Debt Markets; Labor Policies; Insurance LawLanguage:English
Region:The World RegionReport Number:WPS6546
Volume No:1 of 1  

Summary: Weather is a key source of income risk for many firms and households, particularly in emerging market economies. This paper uses a randomized controlled trial approach to study how an innovative risk management instrument for hedging rainfall risk affects production decisions among a sample of Indian agricultural firms. The analysis finds that the provision of insurance induces farmers to shift production toward higher-return but higher-risk cash crops, particularly among more-educated farmers. The results support the view that financial innovation may help mitigate the real effects of uninsured production risk. In a second experiment, the study elicits willingness to pay for insurance policies that differ in their contract terms, using the Becker-DeGroot-Marshak mechanism. Willingness-to-pay is increasing in the actuarial value of the insurance, but substantially less than one-for-one, suggesting that farmers' valuations are inconsistent with a fully rational benchmark.

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