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

Author

Listed:
  • Xavier Gine

    (World Bank)

  • James Vickery

    (Federal Reserve Bank of New York)

  • Shawn Cole

    (Harvard Business School)

Abstract

Rainfall variation and other weather shocks are a key source of risk for many firms and households, particularly in the developing world. We study how the availability of risk management instruments designed to hedge rainfall risk affects investment and production decisions of small- and medium-scale Indian farmers. We use a field experiment approach, involving randomized provision of rainfall insurance to farmers. While we find little effect on total expenditures, increased insurance induces farmers to substitute production activities towards high-return but higher-risk cash crops, consistent with theoretical predictions. Our results support the view that financial innovation may help ameliorate costs associated with weather variability and other types of risk.

Suggested Citation

  • Xavier Gine & James Vickery & Shawn Cole, 2013. "How Does Risk Management Influence Production Decisions? Evidence From a Field Experiment," 2013 Meeting Papers 676, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:676
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    References listed on IDEAS

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    1. Esther Duflo & Michael Kremer & Jonathan Robinson, 2008. "How High Are Rates of Return to Fertilizer? Evidence from Field Experiments in Kenya," American Economic Review, American Economic Association, vol. 98(2), pages 482-488, May.
    2. Dercon, Stefan & Christiaensen, Luc, 2011. "Consumption risk, technology adoption and poverty traps: Evidence from Ethiopia," Journal of Development Economics, Elsevier, vol. 96(2), pages 159-173, November.
    3. Gine, Xavier & Menand, Lev & Townsend, Robert & Vickery, James, 2010. "Microinsurance : a case study of the Indian rainfall index insurance market," Policy Research Working Paper Series 5459, The World Bank.
    4. Russell L. Lamb, 2003. "Fertilizer Use, Risk, and Off-Farm Labor Markets in the Semi-Arid Tropics of India," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(2), pages 359-371.
    5. Dercon, Stefan & Christiaensen, Luc, 2011. "Consumption risk, technology adoption and poverty traps: Evidence from Ethiopia," Journal of Development Economics, Elsevier, vol. 96(2), pages 159-173, November.