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How Does Risk Management Influence Production Decisions? Evidence From a Field Experiment

  • Xavier Gine

    (World Bank)

  • James Vickery

    (Federal Reserve Bank of New York)

  • Shawn Cole

    (Harvard Business School)

Rainfall variation and other weather shocks are a key source of risk for many firms and households, particularly in the developing world. We study how the availability of risk management instruments designed to hedge rainfall risk affects investment and production decisions of small- and medium-scale Indian farmers. We use a field experiment approach, involving randomized provision of rainfall insurance to farmers. While we find little effect on total expenditures, increased insurance induces farmers to substitute production activities towards high-return but higher-risk cash crops, consistent with theoretical predictions. Our results support the view that financial innovation may help ameliorate costs associated with weather variability and other types of risk.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 676.

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Date of creation: 2013
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Handle: RePEc:red:sed013:676
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