Publication: How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment
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2013-07
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2013-09-27
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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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“Cole, Shawn; Giné, Xavier; Vickery, James. 2013. How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment. Policy Research Working Paper;No. 6546. © World Bank. http://hdl.handle.net/10986/15904 License: CC BY 3.0 IGO.”
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