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Index insurance and basis risk: A reconsideration

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  • Lichtenberg, Erik
  • Iglesias, Eva

Abstract

Index insurance has been seen as an important tool for managing the risks faced by farmers in developing countries but uptake has been disappointingly low. Basis risk is often cited as one of the main reasons for the lack of uptake. We investigate the role of basis risk in greater depth by considering contracts that allow farmers to choose the level of the index that triggers an indemnity in addition to coverage. We show that risk averse farmers will select trigger levels to protect against catastrophic outcomes, even if downside basis risk increases. A numerical simulation model bears out our theoretical results.

Suggested Citation

  • Lichtenberg, Erik & Iglesias, Eva, 2022. "Index insurance and basis risk: A reconsideration," Journal of Development Economics, Elsevier, vol. 158(C).
    • Handle: RePEc:eee:deveco:v:158:y:2022:i:c:s0304387822000505
    DOI: 10.1016/j.jdeveco.2022.102883
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    References listed on IDEAS

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    More about this item

    Keywords

    Risk; Agricultural insurance; Index insurance; Development; Rural financial markets;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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