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How does risk management influence production decisions? evidence from a field experiment

  • Cole, Shawn
  • Gine, Xavier
  • Vickery, James

Weather is a key source of income risk for many firms and households, particularly in emerging market economies. This paper uses a randomized controlled trial approach to study how an innovative risk management instrument for hedging rainfall risk affects production decisions among a sample of Indian agricultural firms. The analysis finds that the provision of insurance induces farmers to shift production toward higher-return but higher-risk cash crops, particularly among more-educated farmers. The results support the view that financial innovation may help mitigate the real effects of uninsured production risk. In a second experiment, the study elicits willingness to pay for insurance policies that differ in their contract terms, using the Becker-DeGroot-Marshak mechanism. Willingness-to-pay is increasing in the actuarial value of the insurance, but substantially less than one-for-one, suggesting that farmers'valuations are inconsistent with a fully rational benchmark.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6546.

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Date of creation: 01 Jul 2013
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Handle: RePEc:wbk:wbrwps:6546
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