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Weather index drought insurance: an ex ante evaluation for millet growers in Niger

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  • Leblois, Antoine
  • Quirion, Philippe
  • Alhassane, Agali
  • Traore, Seydou

Abstract

In the Sudano-Sahelian region, which includes South Niger, the inter-annual variability of the rainy season is high and irrigation is scarce. As a consequence, bad rainy seasons have a massive impact on crop yield and regularly entail food crises. Traditional insurances based on crop damage assessment are not available because of asymmetric information and high transaction costs compared to the value of production. We assess the risk mitigation capacity of an alternative form of insurance which has been implemented in India since 2003: insurance based on a weather index. We compare the capacity of various weather indices to increase utility of a representative risk-averse farmer. We show the importance of using plot-level yield data rather than village averages, which bias results. We also illustrate the need for out-of-sample estimations in order to avoid overfitting. Even with the appropriate index and assuming a substantial risk aversion, we find a limited gain of implementing insurance, roughly corresponding to, or slightly exceeding, the cost of implementing such insurances observed in India. However, when we treat separately the plots with and without fertilizers, we show that the benefit of insurance is higher in the former case. This suggests that insurances may increase the use of risk-increasing inputs like fertilizers and improved cultivars, hence average yields, which are very low in the region.

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Bibliographic Info

Paper provided by European Association of Agricultural Economists in its series 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland with number 120378.

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Date of creation: 2011
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Handle: RePEc:ags:eaae11:120378

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Related research

Keywords: Agriculture; index-based insurance.; Crop Production/Industries; Risk and Uncertainty; G21; O12; Q12; Q18; Q54.;

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  1. Shawn Cole & Xavier Giné & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2009. "Barriers to household risk management: evidence from India," Staff Reports 373, Federal Reserve Bank of New York.
  2. Dercon, Stefan & Christiaensen, Luc, 2011. "Consumption risk, technology adoption and poverty traps: Evidence from Ethiopia," Journal of Development Economics, Elsevier, vol. 96(2), pages 159-173, November.
  3. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249.
  4. Carter, Michael R. & Galarza, Francisco & Boucher, Stephen, 2007. "Underwriting area-based yield insurance to crowd-in credit supply and demand," MPRA Paper 24326, University Library of Munich, Germany.
  5. Juan Camilo Cardenas & Jeffrey Carpenter, 2008. "Behavioural Development Economics: Lessons from Field Labs in the Developing World," The Journal of Development Studies, Taylor and Francis Journals, vol. 44(3), pages 311-338.
  6. Vedenov, Dmitry V. & Barnett, Barry J., 2004. "Efficiency of Weather Derivatives as Primary Crop Insurance Instruments," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(03), December.
  7. Gine, Xavier & Townsend, Robert & Vickery, James, 2007. "Patternsof rainfall insurance participation in rural India," Policy Research Working Paper Series 4408, The World Bank.
  8. Antoine Leblois & Philippe Quirion, 2010. "Agricultural Insurances Based on Meteorological Indices: Realizations, Methods and Research Agenda," Working Papers 2010.71, Fondazione Eni Enrico Mattei.
  9. Molini, Vasco & Keyzer, Michiel A. & van den Boom, Bart & Zant, Wouter, 2007. "Creating safety nets through semi-parametric index-based insurance: A simulation for Northern Ghana," 101st Seminar, July 5-6, 2007, Berlin Germany 9263, European Association of Agricultural Economists.
  10. Sommarat Chaniarat & Calum G. Turvey & Andrew G. Mude & Christopher B. Barrett, 2008. "Improving humanitarian response to slow-onset disasters using famine-indexed weather derivatives," Agricultural Finance Review, Emerald Group Publishing, vol. 68(1), pages 169-195, September.
  11. Gunnar Breustedt & Raushan Bokusheva & Olaf Heidelbach, 2008. "Evaluating the Potential of Index Insurance Schemes to Reduce Crop Yield Risk in an Arid Region," Journal of Agricultural Economics, Wiley Blackwell, vol. 59(2), pages 312-328, 06.
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