Drought and Retribution : Evidence from a Large-Scale Rainfall-Indexed Insurance Program in Mexico

Drought and Retribution : Evidence from a Large-Scale Rainfall-Indexed Insurance Program in Mexico

Although weather shocks are a major source of income fluctuation, most of the world's poor lack insurance coverage against them. Absence of formal insurance contributes to poverty traps, as investment decisions are conflicted with risk managem...

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Bibliographic Details
Main Authors:	Fuchs, Alan, Wolff, Hendrik
Format:	Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2016
Subjects:	RISKS HOUSEHOLD SURVEY RISK SHARING ARRANGEMENTS RIGHTS POOR RURAL HOUSEHOLD CHECKS PRODUCTION RISK MANAGEMENT STRATEGIES POVERTY LEVELS ILLITERACY INCOME INTEREST AGRICULTURAL PRODUCTION PROPERTY RIGHTS EXCHANGE AGRICULTURAL DEVELOPMENT COUNTERFACTUAL PROGRAMS INFORMATION LABOR FORCE POLITICAL ECONOMY INSURANCE POLICIES EFFECTS INCENTIVES DURABLE ASSETS PRIVATE INSURANCE REAL INCOME CROP VARIETIES RURAL POPULATION BENEFICIARIES INTERNATIONAL BANK MEASURES INSURANCE MARKET INSURANCE COMPANY POLICYHOLDERS CROP INSURANCE RURAL HOUSEHOLD RURAL HOUSEHOLDS CASH CROPS TRAINING DEVELOPMENT ECONOMICS MORAL HAZARD HOUSEHOLD HEAD INSURANCE PRODUCT AGRICULTURAL TECHNOLOGY CONTRACTS PRODUCTIVITY TRANSFERS MARKETS HOUSEHOLD INCOME ORGANIZATIONS RATES INSURERS STANDARDS LABOR LOANS FARMERS RISK SHARING FAMINE REINSURANCE MARKETS CASH TRANSFERS INSURANCE COVERAGE MORTALITY EFFICIENCY COVARIATE SHOCKS MINIMUM WAGES ADMINISTRATIVE COSTS FEMALE LABOR AGRICULTURAL POLICY INVESTMENT DECISIONS EXPENDITURE INSURANCES REINSURANCE EQUITY INFANT MORTALITY PRODUCTIVITY GROWTH WAGES POVERTY INDEX POLICIES DROUGHT RUNNING WATER MARKET FAILURES PRODUCTION OF CASH CROPS VALUE LAND QUALITY LOSSES RURAL LEVEL CREDIT INSURANCE CONTRACTS AGRICULTURAL INSURANCE CLAIMS RURAL POVERTY RURAL SETTINGS RISK EXPOSURE IMPLICIT CONTRACTS AGRICULTURAL LAND MALNUTRITION RURAL LAND SIZE MARKET TRANSFER PROGRAMS RISK TRANSFER ECONOMICS MANAGEMENT INSURANCE INSURANCE PREMIUMS LOSS CONSUMPTION SMOOTHING THEORY DURABLE LACK OF INFRASTRUCTURE INVESTMENT EXTREME POVERTY IRRIGATION RISK INCOME SMOOTHING INDEMNITY RURAL AREAS POVERTY PRIVATE INSURANCE COMPANIES FEMALE LABOR FORCE SUPPLY RISK TAKING PROFIT FINANCIAL SUPPORT AGRICULTURAL PRODUCTIVITY INVESTMENTS RISK MANAGEMENT CASH TRANSFER PROGRAMS POOR INSURANCE COMPANIES COMMUNAL LAND INDEMNITY PAYMENTS OUTCOMES BASIS RISK COVERAGE GUARANTEE ADVERSE SELECTION PREMIUMS
Online Access:	http://documents.worldbank.org/curated/en/2016/02/25927053/drought-retribution-evidence-large-scale-rainfall-indexed-insurance-program-mexico http://hdl.handle.net/10986/23902

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Summary:	Although weather shocks are a major source of income fluctuation, most of the world's poor lack insurance coverage against them. Absence of formal insurance contributes to poverty traps, as investment decisions are conflicted with risk management ones: risk-averse farmers tend to underinvest and produce lower yielding yet safer crops. In the past few years, weather index insurance has gained increasing attention as an effective tool to provide small-scale farmers coverage against aggregate shocks. However, there is little empirical evidence about its effectiveness. This paper studies the effect of the recently introduced rainfall-indexed insurance on farmers' productivity, risk management strategies, as well as per capita income and expenditure in Mexico. The identification strategy takes advantage of the variation across counties and across time in which the insurance was rolled-out. The analysis finds that the presence of insurance in treated counties has significant and positive effects on maize productivity. Similarly, there is a positive association between the presence of insurance in the municipality and rural households' per capita expenditure and income, although no significant relation is found between the presence of insurance and the number of hectares destined for maize production.