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Index Insurance and Common Property Pastures

  • Haimanti Bhattacharya
  • Dan Osgood
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    This paper presents a theoretical model to investigate the potential environmental consequences of weather index based insurance, a tool for mitigating weather risk that is gaining momentum in developing countries. We model potential effects of index insurance for pastoralists on animal stocking decisions and the resulting effects on common property resource quality. We find that although this proposed financial tool has the potential of significantly enhancing the welfare of pastoralists by enhancing expected payoffs and reducing the exit of pastoralists, under certain conditions the insurance can worsen overstocking problems in low rainfall states of nature. In these cases, the insurance has an unintended negative effect on pasture quality that can undermine the long run sustainability of the common pool resource. Model extensions show that low error seasonal climate forecasts and/or reduction in ex-post stock readjustment costs arising from market imperfections can help in mitigating this potential negative effect.

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    Paper provided by University of Utah, Department of Economics in its series Working Paper Series, Department of Economics, University of Utah with number 2008_21.

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    Length: 33 pages
    Date of creation: 2008
    Date of revision:
    Handle: RePEc:uta:papers:2008_21
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