Cole, ShawnGiné, XavierVickery, James2013-09-272013-09-272013-07https://hdl.handle.net/10986/15904Weather 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.en-USCC BY 3.0 IGOACCESS TO INSURANCEACCOUNTINGADVERSE SELECTIONALLOCATIONAMOUNT OF CREDITASSET HOLDINGSAUCTIONAUTOMOBILE INSURANCEBANK POLICYBIDBIDSBONDBOND MARKETBORROWINGBUDGETINGCAPITAL FLOWSCAPITAL INVESTMENTCAPITAL STRUCTURECASH PAYMENTCHECKSCLIMATECLIMATE CHANGECLIMATE VARIABILITYCOMMODITY PRICECOMPENSATIONCONSUMERSCONSUMPTION SMOOTHINGCORPORATE FINANCECORPORATE INVESTMENTCOST OF INSURANCECOUPONSCREDIT DEFAULTCREDIT DEFAULT SWAPSCREDIT RISKCROP INSURANCEDATED CHECKDECISIONMAKINGDERIVATIVESDEVELOPING COUNTRIESDEVELOPMENT ECONOMICSDISTRIBUTIONAL EFFECTSDUMMY VARIABLEECONOMIC ACTIVITYECONOMIC THEORYEMERGING MARKETEMERGING MARKET COUNTRIESEMERGING MARKET ECONOMIESEMERGING MARKET ECONOMYEMPLOYMENTEXCHANGE RATEEXPENDITURESFACE VALUEFARMING HOUSEHOLDFEDERAL RESERVEFEDERAL RESERVE BANKFEDERAL RESERVE SYSTEMFINANCIAL ASSETSFINANCIAL CONSTRAINTSFINANCIAL DECISIONSFINANCIAL ECONOMICSFINANCIAL INNOVATIONFINANCIAL INSTITUTIONSFINANCIAL INTERMEDIATIONFINANCIAL STUDIESFINANCIAL SUPPORTFINANCIAL SYSTEMFOREIGN CURRENCYFORGIVENESSFUTURESHOUSEHOLD INCOMEHOUSEHOLD SAVINGSHOUSEHOLD WEALTHHURRICANEINCOMEINCOME DISTRIBUTIONINCOME SHOCKSINCOME SMOOTHINGINCOME STREAMINCOMPLETE MARKETSINNOVATIONSINSTRUMENTINSURANCEINSURANCE AGENTSINSURANCE ARRANGEMENTSINSURANCE COMPANYINSURANCE CONTRACTINSURANCE CONTRACTSINSURANCE COVERAGEINSURANCE MARKETINSURANCE MARKETSINSURANCE PAYOUTINSURANCE POLICIESINSURANCE POLICYINSURANCE PRODUCTINSURANCE PRODUCTSINSURANCE SECTORINSURERSINTEREST RATEINTEREST RATE SWAPSINTERNATIONAL BANKINVESTINGINVESTMENT BEHAVIORINVESTMENT DECISIONSLABOR SUPPLYLAND USELANDOWNERLIFE INSURANCELIQUID ASSETSMARKET ECONOMIESMARKET ECONOMYMARKET VALUEMICRO-INSURANCEMICROINSURANCEMISSING MARKETSMONETARY VALUESMONEYLENDERSMORAL HAZARDMORTALITYNET COSTOPTIMAL INVESTMENTPARTICULAR DEBTPOLITICAL ECONOMYPORTFOLIOPORTFOLIO CHOICEPOST OFFICEPRESENT VALUEPRODUCTIVITYPROFITABILITYRATES OF RETURNRESOURCE ECONOMICSRETURNRETURNSRISK AVERSIONRISK DIVERSIFICATIONRISK EXPOSURERISK MANAGEMENTRISK MITIGATIONSECURITIZATIONSETTLEMENTSETTLEMENT DATESUBSTITUTIONTAXTRANSACTIONTRANSITORY INCOMEUTILITY FUNCTIONVALUATIONVALUATION TECHNIQUESVALUATIONSWEALTH EFFECTSWEATHER DERIVATIVESWEATHER INSURANCEhousehold financeunderinvestmentWorld Bank10.1596/1813-9450-6546