Staff Report, Federal Reserve Bank of New York 302
This paper describes the contract design and institutional features of an innovative rainfall insurance policy offered to smallholder farmers in rural India and presents preliminary evidence on the determinants of insurance participation. Insurance take-up is found to be decreasing in basis risk between insurance payouts and income fluctuations, higher among wealthy households, and lower among households that are credit constrained. These results match predictions of a simple neoclassical model appended with borrowing constraints. Other patterns are less consistent with the benchmark model. Namely, participation in village networks and measures of familiarity with the insurance vendor are strongly correlated with insurance take-up decisions, and risk averse households are found to be less, not more, likely to purchase insurance. We present evidence suggesting that these results reflect uncertainty about the product itself, given households’ limited experience with it.
rainfall insurance, household finance, risk sharing, India