Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/64476
Authors: 
Bhattacharya, Haimanti
Osgood, Dan
Year of Publication: 
2008
Series/Report no.: 
Working Paper, University of Utah, Department of Economics 2008-21
Abstract: 
This paper presents a theoretical model to investigate the potential environmental consequences of weather index based insurance, a tool for mitigating weather risk that is gaining momentum in developing countries. We model potential effects of index insurance for pastoralists on animal stocking decisions and the resulting effects on common property resource quality. We find that although this proposed financial tool has the potential of significantly enhancing the welfare of pastoralists by enhancing expected payoffs and reducing the exit of pastoralists, under certain conditions the insurance can worsen overstocking problems in low rainfall states of nature. In these cases, the insurance has an unintended negative effect on pasture quality that can undermine the long run sustainability of the common pool resource. Model extensions show that low error seasonal climate forecasts and/or reduction in ex-post stock readjustment costs arising from market imperfections can help in mitigating this potential negative effect.
Subjects: 
Index Insurance
Pasture
Common Property
JEL: 
G2
O13
P14
Document Type: 
Working Paper

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