Insuring against droughts: Evidence on agricultural intensification and index insurance demand from a randomized evaluation in rural Bangladesh

• Agricultural Economics Workshop
• Development Workshop

Date and Location

Monday, February 27, 2017, 4:10 PM - 5:30 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

This study assesses both the demand for and effectiveness of an innovative index insurance product designed to help smallholder farmers in Bangladesh manage risk to crop yields and the increased production costs associated with drought. Villages were randomized into either an insurance treatment or a comparison group, and discounts and rebates were randomly allocated across treatment villages to encourage insurance take-up and to allow for the estimation of the price-elasticity of insurance demand. Among those offered insurance, we find insurance demand to be moderately price elastic, with discounts significantly more successful in stimulating demand than rebates. Farmers that are highly risk averse or sensitive to basis risk prefer a rebate to a discount, suggesting that the rebate may partially offset some of the implicit costs associated with insurance contract nonperformance. Having insurance yields both ex ante risk management effects as well as ex post income effects on agricultural input use. The risk management effects lead to increased expenditures on inputs during the aman rice growing season, including for risky inputs such as fertilizers, as well as for irrigation and pesticides. The income effects lead to increased seed expenditures during the boro rice growing season, which may signal insured farmers’ higher rates of seed replacement which broadens access to technological improvements embodied in newer seeds, as well as enhancing the genetic purity of cultivated seeds.