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Enabling productive but asset-poor farmers to succeed : A risk financing framework

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  • Gurenko, Eugene
  • Olivier, Mahul

Abstract

This paper examines how market-based risk financing instruments could enable asset-poor but productive farmers exposed to production shocks to engage in riskier but higher-return agricultural activities. The financing of these exogenous shocks is addressed in a conceptual framework based on an optimal allocation of capital where the farm is viewed as a business unit. The approach allows for (1) testing the business viability of a specified crop by assessing the minimum business capital required to ensure the continuity of the business after the occurrence of an adverse production shock; and (2) designing an optimal risk financing program to finance the minimum capital requirements using a combination of instruments (insurance, savings, and borrowing). The authors provide numerical and graphical examples to illustrate the relevance of this financial approach to the specific issues of agricultural risk management.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3211.

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Date of creation: 01 Feb 2004
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Handle: RePEc:wbk:wbrwps:3211

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Keywords: Insurance&Risk Mitigation; Payment Systems&Infrastructure; Environmental Economics&Policies; Banks&Banking Reform; Labor Policies; Banks&Banking Reform; Environmental Economics&Policies; Insurance&Risk Mitigation; Economic Theory&Research; Crops&Crop Management Systems;

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  1. Binswanger, Hans P & McIntire, John, 1987. "Behavioral and Material Determinants of Production Relations in Land-Abundant Tropical Agriculture," Economic Development and Cultural Change, University of Chicago Press, vol. 36(1), pages 73-99, October.
  2. Takeshi Sakurai & Thomas Reardon, 1997. "Potential Demand for Drought Insurance in Burkina Faso and Its Determinants," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 79(4), pages 1193-1207.
  3. Mario J. Miranda & Joseph W. Glauber, 1997. "Systemic Risk, Reinsurance, and the Failure of Crop Insurance Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 79(1), pages 206-215.
  4. Dercon, Stefan, 2002. "Income Risk, Coping Strategies and Safety Nets," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  5. Gurenko, Eugene & Mahul, Olivier, 2003. "Combining insurance, contingent debt, and self-retention in an optimal corporate risk financing strategy," Policy Research Working Paper Series 3167, The World Bank.
  6. Robert Holzmann & Steen Jorgensen, 2000. "Social risk management : a new conceptual framework for social protection and beyond," Social Protection Discussion Papers 21314, The World Bank.
  7. Siegel, Paul B. & Alwang, Jeffrey & Canagarajah, Sudharshan, 2001. "Viewing microinsurance as a social risk management instrument," Social Protection Discussion Papers 23305, The World Bank.
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