Handling the Weather : Insurance, Savings, and Credit in West Africa
Farmers in developing countries face a wide array of risks. Yet they often lack formal financial instruments to protect against risks. This paper examines the impact on consumption, investment, and welfare of the separate provision of three financial products: weather insurance, savings, and credit. The paper develops a dynamic stochastic mode to capture the essential features of the lives of West African rural households. The model is calibrated with data from farmers in Burkina Faso and Senegal, to assess quantitatively the effects of three policy interventions. For each intervention the analysis first considers a benchmark scenario that abstracts from the flaws that affect each instrument; later the assumptions are relaxed. Weather insurance offers the largest welfare gains at each level of wealth, although the gains are significantly reduced by introducing a multiple on the insurance premium. Over time, however, savings can lead to substantial gains, higher than those achievable by unsubsidized weather insurance.
Summary: | Farmers in developing countries face a
wide array of risks. Yet they often lack formal financial
instruments to protect against risks. This paper examines
the impact on consumption, investment, and welfare of the
separate provision of three financial products: weather
insurance, savings, and credit. The paper develops a dynamic
stochastic mode to capture the essential features of the
lives of West African rural households. The model is
calibrated with data from farmers in Burkina Faso and
Senegal, to assess quantitatively the effects of three
policy interventions. For each intervention the analysis
first considers a benchmark scenario that abstracts from the
flaws that affect each instrument; later the assumptions are
relaxed. Weather insurance offers the largest welfare gains
at each level of wealth, although the gains are
significantly reduced by introducing a multiple on the
insurance premium. Over time, however, savings can lead to
substantial gains, higher than those achievable by
unsubsidized weather insurance. |
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