Staff Report, Federal Reserve Bank of New York 692
Weather is a key source of income risk, particularly in emerging market economies. This paper uses a randomized controlled trial involving a sample of Indian farmers to study how an innovative rainfall insurance product affects production decisions. We find that insurance provision induces farmers - particular ly educated farmers - to shift production toward higher-return but higher-risk cash crops. Our results support the view that financial innovation can mitigate the real effects of uninsured production risk. Addressing the puzzle of low adoption, we show that pay outs improve trust in the product and that farmers shield payouts from claims by relatives.