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Underwriting area-based yield insurance to crowd-in credit supply and demand

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Listed:
  • Carter, Michael R.
  • Galarza, Francisco
  • Boucher, Stephen

Abstract

Recent theoretical and empirical evidence suggests that risk (especially covariant risk that is correlated across producers) may discourage both the supply of agricultural credit and the willingness of small holders to utilize available credit and enjoy the higher expected incomes credit could make available to them. One possible resolution to this problem is to remove risk from the system by independently insuring it. However, conventional (all hazard) crop insurance has in almost every instance been rendered financially unsustainable by moral hazard and adverse selection problems. This paper instead analyzes two index-based insurance schemes, one based on a weather index, and a second based on measured average yields. While these index insurance products do not protect the farmer from all risks, our econometric analysis (which is based on data from the north coast of Peru) shows that they could have substantial value to the producer and could also crowd-in credit supply from lenders reluctant to carry too much covariant risk in their loan portfolios. We also show that insurance based on measured yields is markedly superior to a weather index (for both borrowers and lenders). We close by arguing that present and past public good failures justify public intervention in this area, and analyze the feasibility of a public scheme to initially underwrite the costs and uncertainties associated with area-based yield insurance.

Suggested Citation

  • 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.
  • Handle: RePEc:pra:mprapa:24326
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    References listed on IDEAS

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    5. Catherine Guirkinger & Stephen R. Boucher, 2008. "Credit constraints and productivity in Peruvian agriculture," Agricultural Economics, International Association of Agricultural Economists, vol. 39(3), pages 295-308, November.
    6. Nancy McCarthy, 2003. "Demand for rainfall-index based insurance: a case study from Morocco," EPTD discussion papers 106, International Food Policy Research Institute (IFPRI).
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Farrin, Kathleen M. & Miranda, Mario J., 2013. "Premium Benefits? A Heterogeneous Agent Model of Credit-Linked Index Insurance and Farm Technology Adoption," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149666, Agricultural and Applied Economics Association.
    2. Petraud, Jean & Boucher, Stephen & Carter, Michael, 2015. "Competing theories of risk preferences and the demand for crop insurance: Experimental evidence from Peru," 2015 Conference, August 9-14, 2015, Milan, Italy 211383, International Association of Agricultural Economists.
    3. Sommarat CHANTARAT & Kirk PANNANGPETCH & Nattapong PUTTANAPONG & Thanasin TANOMPONGHANDH, 2013. "Index-Based Risk Financing and Development of Natural Disaster Insurance Programs in Developing Asian Countries," Working Papers DP-2013-09, Economic Research Institute for ASEAN and East Asia (ERIA).
    4. Antoine Leblois & Philippe Quirion & Agali Alhassane & Seydou Traoré, 2014. "Weather Index Drought Insurance: An Ex Ante Evaluation for Millet Growers in Niger," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 57(4), pages 527-551, April.
    5. Morsink,Karlijn & Clarke,Daniel Jonathan & Mapfumo,Shadreck, 2016. "How to measure whether index insurance provides reliable protection," Policy Research Working Paper Series 7744, The World Bank.
    6. K S Aditya & Avinash Kishore & Md Tajuddin Khan, 2020. "Exploring farmers’ willingness to pay for crop insurance products: A case of weather-based crop insurance in Punjab India," Agricultural Economics Research Review, Agricultural Economics Research Association (India), vol. 33(2), December.
    7. Jie Yu & Xiao Han & Baozhen Chen & Jinzheng Ren, 2020. "Estimating the Impact of Poverty Alleviation Microcredit on the Income of Poor Households Using the Propensity Score Matching Method: Evidence from China," Agriculture, MDPI, Open Access Journal, vol. 10(7), pages 1-19, July.
    8. Jing Cai, 2016. "The Impact of Insurance Provision on Household Production and Financial Decisions," American Economic Journal: Economic Policy, American Economic Association, vol. 8(2), pages 44-88, May.
    9. Clarke,Daniel Jonathan & Mahul,Olivier & Verma,Niraj, 2012. "Improving farmers'access to agricultural insurance in India," Policy Research Working Paper Series 5987, The World Bank.
    10. Antoine Leblois & Philippe Quirion & Benjamin Sultan, 2013. "Price vs. weather shock hedging for cash crops: ex ante evaluation for cotton producers in Cameroon," Working Papers hal-00796528, HAL.
    11. Daniel J. Clarke, 2016. "A Theory of Rational Demand for Index Insurance," American Economic Journal: Microeconomics, American Economic Association, vol. 8(1), pages 283-306, February.
    12. Benjamin L. Collier, 2020. "Strengthening Local Credit Markets Through Lender‐Level Index Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(2), pages 319-349, June.
    13. Castillo, Maria Jose & Boucher, Stephen & Carter, Michael, 2016. "Index Insurance: Using Public Data to Benefit Small-Scale Agriculture," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 19(A), pages 1-22, June.
    14. Platteau, Jean-Philippe & De Bock, Ombeline & Gelade, Wouter, 2017. "The Demand for Microinsurance: A Literature Review," World Development, Elsevier, vol. 94(C), pages 139-156.
    15. Chantarat, Sommarat & Mude, Andrew G. & Barrett, Christopher B. & Turvey, Calum G., 2017. "Welfare Impacts of Index Insurance in the Presence of a Poverty Trap," World Development, Elsevier, vol. 94(C), pages 119-138.
    16. Sommarat Chantarat, 2015. "Index-based Risk Financing and Development of Natural Disaster Insurance Programs in Developing Countries," PIER Discussion Papers 10., Puey Ungphakorn Institute for Economic Research, revised Nov 2015.
    17. Nathaniel Jensen & Christopher Barrett, 2017. "Agricultural Index Insurance for Development," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 39(2), pages 199-219.
    18. Hans P. Binswanger-Mkhize, 2012. "Is There Too Much Hype about Index-based Agricultural Insurance?," Journal of Development Studies, Taylor & Francis Journals, vol. 48(2), pages 187-200, February.
    19. Clarke,Daniel Jonathan & Wren-Lewis,Liam, 2016. "Solving commitment problems in disaster risk finance," Policy Research Working Paper Series 7720, The World Bank.
    20. Naranjo, María A. & Pieters, Janneke & Alpízar, Francisco, 2019. "Credit, insurance and farmers’ liability: Evidence from a lab in the field experiment with coffee farmers in Costa Rica," Journal of Economic Behavior & Organization, Elsevier, vol. 166(C), pages 12-27.
    21. Karlan, Dean & Morduch, Jonathan, 2010. "Access to Finance," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4703-4784, Elsevier.
    22. Diana Fletschner & Catherine Guirkinger & Steve Boucher, 2010. "Risk, Credit Constraints and Financial Efficiency in Peruvian Agriculture," Journal of Development Studies, Taylor & Francis Journals, vol. 46(6), pages 981-1002.
    23. K.S. , A. & Khan, T. & Kishore, A., 2018. "Willingness to pay for Weather Based Crop Insurance in Punjab," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277516, International Association of Agricultural Economists.

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    More about this item

    Keywords

    Yield Insurance; Crop Insurance; Peru;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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