How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment

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.

Bibliographic Details

Main Authors:	Cole, Shawn, Giné, Xavier, Vickery, James
Language:	English en_US
Published:	World Bank, Washington, DC 2013-07
Subjects:	ACCESS TO INSURANCE, ACCOUNTING, ADVERSE SELECTION, ALLOCATION, AMOUNT OF CREDIT, ASSET HOLDINGS, AUCTION, AUTOMOBILE INSURANCE, BANK POLICY, BID, BIDS, BOND, BOND MARKET, BORROWING, BUDGETING, CAPITAL FLOWS, CAPITAL INVESTMENT, CAPITAL STRUCTURE, CASH PAYMENT, CHECKS, CLIMATE, CLIMATE CHANGE, CLIMATE VARIABILITY, COMMODITY PRICE, COMPENSATION, CONSUMERS, CONSUMPTION SMOOTHING, CORPORATE FINANCE, CORPORATE INVESTMENT, COST OF INSURANCE, COUPONS, CREDIT DEFAULT, CREDIT DEFAULT SWAPS, CREDIT RISK, CROP INSURANCE, DATED CHECK, DECISIONMAKING, DERIVATIVES, DEVELOPING COUNTRIES, DEVELOPMENT ECONOMICS, DISTRIBUTIONAL EFFECTS, DUMMY VARIABLE, ECONOMIC ACTIVITY, ECONOMIC THEORY, EMERGING MARKET, EMERGING MARKET COUNTRIES, EMERGING MARKET ECONOMIES, EMERGING MARKET ECONOMY, EMPLOYMENT, EXCHANGE RATE, EXPENDITURES, FACE VALUE, FARMING HOUSEHOLD, FEDERAL RESERVE, FEDERAL RESERVE BANK, FEDERAL RESERVE SYSTEM, FINANCIAL ASSETS, FINANCIAL CONSTRAINTS, FINANCIAL DECISIONS, FINANCIAL ECONOMICS, FINANCIAL INNOVATION, FINANCIAL INSTITUTIONS, FINANCIAL INTERMEDIATION, FINANCIAL STUDIES, FINANCIAL SUPPORT, FINANCIAL SYSTEM, FOREIGN CURRENCY, FORGIVENESS, FUTURES, HOUSEHOLD INCOME, HOUSEHOLD SAVINGS, HOUSEHOLD WEALTH, HURRICANE, INCOME, INCOME DISTRIBUTION, INCOME SHOCKS, INCOME SMOOTHING, INCOME STREAM, INCOMPLETE MARKETS, INNOVATIONS, INSTRUMENT, INSURANCE, INSURANCE AGENTS, INSURANCE ARRANGEMENTS, INSURANCE COMPANY, INSURANCE CONTRACT, INSURANCE CONTRACTS, INSURANCE COVERAGE, INSURANCE MARKET, INSURANCE MARKETS, INSURANCE PAYOUT, INSURANCE POLICIES, INSURANCE POLICY, INSURANCE PRODUCT, INSURANCE PRODUCTS, INSURANCE SECTOR, INSURERS, INTEREST RATE, INTEREST RATE SWAPS, INTERNATIONAL BANK, INVESTING, INVESTMENT BEHAVIOR, INVESTMENT DECISIONS, LABOR SUPPLY, LAND USE, LANDOWNER, LIFE INSURANCE, LIQUID ASSETS, MARKET ECONOMIES, MARKET ECONOMY, MARKET VALUE, MICRO-INSURANCE, MICROINSURANCE, MISSING MARKETS, MONETARY VALUES, MONEYLENDERS, MORAL HAZARD, MORTALITY, NET COST, OPTIMAL INVESTMENT, PARTICULAR DEBT, POLITICAL ECONOMY, PORTFOLIO, PORTFOLIO CHOICE, POST OFFICE, PRESENT VALUE, PRODUCTIVITY, PROFITABILITY, RATES OF RETURN, RESOURCE ECONOMICS, RETURN, RETURNS, RISK AVERSION, RISK DIVERSIFICATION, RISK EXPOSURE, RISK MANAGEMENT, RISK MITIGATION, SECURITIZATION, SETTLEMENT, SETTLEMENT DATE, SUBSTITUTION, TAX, TRANSACTION, TRANSITORY INCOME, UTILITY FUNCTION, VALUATION, VALUATION TECHNIQUES, VALUATIONS, WEALTH EFFECTS, WEATHER DERIVATIVES, WEATHER INSURANCE, household finance, underinvestment,
Online Access:	http://documents.worldbank.org/curated/en/2013/07/18030727/risk-management-influence-production-decisions-evidence-field-experiment https://hdl.handle.net/10986/15904
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