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The Impact of Weather Insurance on Consumption, Investment, and Welfare

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  • Francesca de Nicola

    (IFPRI)

Abstract

Weather variations crucially affect the wellbeing of farmers in developing countries. I develop and estimate a dynamic stochastic optimization model to assess the impact of weather insurance on the consumption, investment, and welfare for farmers in developing countries. The parameters of the model are pinned down with a combination of calibration and structural estimation using data from Malawi. Contrary to some past work, I find that weather insurance has the potential to provide substantial welfare gains equivalent to almost a 17% permanent increase in consumption. These gains can be magnified especially for the poorest households by contemporaneously extending credit to finance the additional desired investment. In an extension of the model I also show that weather insurance can allow for the adoption of riskier but more-productive improved seeds, further boosting farmers' welfare. Finally, I explore the extent to which the interplay with other uninsured risks, the presence of basis risk, and a loading factor on the insurance premium may lower the welfare gains from weather insurance, and lead to low take-up as is often observed empirically.

Suggested Citation

  • Francesca de Nicola, 2011. "The Impact of Weather Insurance on Consumption, Investment, and Welfare," 2011 Meeting Papers 548, Society for Economic Dynamics.
    • Handle: RePEc:red:sed011:548
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    Citations

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    Cited by:

    1. Matsuda, Ayako & Kurosaki, Takashi & Sawada, Yasuyuki, 2013. "Rainfall and Temperature Index Insurance in India: Project Documentation," PRIMCED Discussion Paper Series 34, Institute of Economic Research, Hitotsubashi University.
    2. Dean Karlan & Robert Osei & Isaac Osei-Akoto & Christopher Udry, 2014. "Agricultural Decisions after Relaxing Credit and Risk Constraints," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(2), pages 597-652.
    3. Ricome, Aymeric & Affholder, François & Gérard, Françoise & Muller, Bertrand & Poeydebat, Charlotte & Quirion, Philippe & Sall, Moussa, 2017. "Are subsidies to weather-index insurance the best use of public funds? A bio-economic farm model applied to the Senegalese groundnut basin," Agricultural Systems, Elsevier, vol. 156(C), pages 149-176.
    4. Ashimwe, Olive, 2016. "An Economic Analysis Of Impact Of Weather Index-Based Crop Insurance On Household Income In Huye District Of Rwanda," Research Theses 265675, Collaborative Masters Program in Agricultural and Applied Economics.
    5. Antoine Leblois & Philippe Quirion & Benjamin Sultan, 2013. "Price vs. weather shock hedging for cash crops: ex ante evaluation for cotton producers in Cameroon," CIRED Working Papers hal-00796528, HAL.
    6. Ayako Matsuda & Takashi Kurosaki, 2017. "Temperature and Rainfall Index Insurance in India," OSIPP Discussion Paper 17E002, Osaka School of International Public Policy, Osaka University.
    7. Daniel Clarke & Francesca de Nicola & Ruth Vargas Hill & Neha Kumar & Parendi Mehta, 2015. "A Chat about Insurance: Experimental Results from Rural Bangladesh," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 37(3), pages 477-501.
    8. de Nicola, Francesca, 2015. "Handling the weather : insurance, savings, and credit in West Africa," Policy Research Working Paper Series 7187, The World Bank.
    9. Sarah A Janzen & Michael R Carter, 2019. "After the Drought: The Impact of Microinsurance on Consumption Smoothing and Asset Protection," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 101(3), pages 651-671.
    10. Clarke, Danielle & Das, Narayan C. & de Nicola, Francesca & Hill, Ruth Vargas & Kumar, Neha & Mehta, Parendi, 2012. "The value of customized insurance for farmers in rural Bangladesh:," IFPRI discussion papers 1202, International Food Policy Research Institute (IFPRI).
    11. Janzen, Sarah A. & Carter, Michael R. & Ikegami, Munenobu, 2012. "Valuing Asset Insurance in the Presence of Poverty Traps: A Dynamic Approach," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124805, Agricultural and Applied Economics Association.
    12. Hill, Ruth Vargas & Kumar, Neha & Magnan, Nicholas & Makhija, Simrin & de Nicola, Francesca & Spielman, David J. & Ward, Patrick S., 2019. "Ex ante and ex post effects of hybrid index insurance in Bangladesh," Journal of Development Economics, Elsevier, vol. 136(C), pages 1-17.
    13. Alexandre Marcellesi & Nancy Cartwright, 2013. "Modeling climate mitigation and adaptation policies to predict their effectiveness: The limits of randomized controlled trials," GRI Working Papers 120, Grantham Research Institute on Climate Change and the Environment.
    14. Ashimwe, Olive, 2016. "An Economic Analysis Of Impact Of Weather Index-Based Crop Insurance On Household Income In Huye District Of Rwanda," Research Theses 276460, Collaborative Masters Program in Agricultural and Applied Economics.
    15. Aina, I. & Ayinde, O.E. & Thiam, D. & Miranda, M., 2018. "Willingness to Pay for Index-Based Livestock Insurance: Perspectives from West Africa," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277383, International Association of Agricultural Economists.

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