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Risk, Insurance and Wages in General Equilibrium

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  • Mark Rosenzweig

    () (Economic Growth Center, Yale University)

  • Ahmed Musfiq Mobarak

    () (Economic Growth Center, Yale University)

Abstract

We estimate the general-equilibrium labor market effects of a large-scale randomized intervention in which we designed and marketed a rainfall index insurance product across three states in India. Marketing agricultural insurance to both cultivators and to agricultural wage laborers allows us to test a general-equilibrium model of wage determination in settings where households supplying labor and households hiring labor face weather risk. Consistent with theoretical predictions, we find that both labor demand and equilibrium wages become more rainfall sensitive when cultivators are offered rainfall insurance, because insurance induces cultivators to switch to riskier, higher-yield production methods. The same insurance contract offered to agricultural laborers smoothes wages across rainfall states by inducing changes in labor supply. Policy simulations based on our estimates suggest that selling insurance only to land-owning cultivators and precluding the landless from the insurance market (which is the current regulatory practice in India and other developing countries), makes wage laborers worse off relative to a situation where insurance does not exist at all. The general-equilibrium analysis reveals that the welfare costs of curren regulation are borne by landless laborers, who represent the poorest segment of society and whose risk management options are the most limited.

Suggested Citation

  • Mark Rosenzweig & Ahmed Musfiq Mobarak, 2013. "Risk, Insurance and Wages in General Equilibrium," Working Papers 1035, Economic Growth Center, Yale University.
  • Handle: RePEc:egc:wpaper:1035
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    Cited by:

    1. Michael R. CARTER & Alain de JANVRY & Elisabeth SADOULET & Alexandros SARRIS, 2014. "Index-based weather insurance for developing countries: A review of evidence and a set of propositions for up-scaling," Working Papers P111, FERDI.
    2. Joshua D Merfeld, 2020. "Moving Up or Just Surviving? Nonfarm Self‐Employment in India," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(1), pages 32-53, January.
    3. Mark R. Rosenzweig & Christopher Udry, 2014. "Rainfall Forecasts, Weather, and Wages over the Agricultural Production Cycle," American Economic Review, American Economic Association, vol. 104(5), pages 278-283, May.
    4. Daniel LaFave & Duncan Thomas, 2016. "Farms, Families, and Markets: New Evidence on Completeness of Markets in Agricultural Settings," Econometrica, Econometric Society, vol. 84, pages 1917-1960, September.
    5. Dinkelman, Taryn & Schulhofer-Wohl, Sam, 2015. "Migration, congestion externalities, and the evaluation of spatial investments," Journal of Development Economics, Elsevier, vol. 114(C), pages 189-202.
    6. Alain de Janvry & Elisabeth Sadoulet, 2019. "Transforming developing country agriculture: Removing adoption constraints and promoting inclusive value chain development," Working Papers hal-02287668, HAL.
    7. Kate Ambler & Alan de Brauw & Susan Godlonton, 2018. "Rural Labor Market Responses to Large Lumpy Cash Transfers: Evidence from Malawi," Department of Economics Working Papers 2018-11, Department of Economics, Williams College.
    8. Carter, Michael R. & Cheng, Lan & Sarris, Alexandros, 2016. "Where and how index insurance can boost the adoption of improved agricultural technologies," Journal of Development Economics, Elsevier, vol. 118(C), pages 59-71.
    9. Serfilippi, Elena & Carter, Michael & Guirkinger, Catherine, 2020. "Insurance contracts when individuals “greatly value” certainty: Results from a field experiment in Burkina Faso," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 731-743.
    10. de Janvry, Alain & Sadoulet, Elisabeth, 2020. "Using agriculture for development: Supply- and demand-side approaches," World Development, Elsevier, vol. 133(C).
    11. John, Felix & Toth, Russell & Frank, Karin & Groeneveld, Jürgen & Müller, Birgit, 2019. "Ecological Vulnerability Through Insurance? Potential Unintended Consequences of Livestock Drought Insurance," Ecological Economics, Elsevier, vol. 157(C), pages 357-368.
    12. Fink, Günther & Jack, Kelsey & Masiye, Felix, 2014. "Seasonal Credit Constraints and Agricultural Labor Supply: Evidence from Zambia," IZA Discussion Papers 8657, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    Index insurance; Agricultural Wages; General Equilibrium Effects;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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