Agricultural risk is a particularly damaging problem for farmers in developing countries who do not have access to financial safety nets or the assets to withstand severe crop failure. Because multi-peril individualized crop insurance is plagued with costly informational problems, much attention has been paid to index-based insurance as a tool to mitigate risk. However, several recent experiences with index insurance products in developing countries have had lower-than-expected participation. In this thesis, I revist the microeconomic framework upon which area yield insurance, a common type of index insurance, is based. I relax key assumptions on loading costs and the presence of informal risk sharing arrangements (IRSA's) that guarantee a consumption minimum. In adding elements of realism to the model, I find that predictions for demand are very sensitive to household characteristics like risk preferences and wealth, and that overall demand predictions are lower than under the previous, more restrictive assumptions. Further, institutional characteristics like the presence of subsidies or the strength of IRSA's have the potential to severely impact demand for index insurance.
The context for the empirical analysis is the Lambayeque valley in the north coast of Peru, where policymakers in the region are considering expanding an infant index insurance market. Under the original, simplified assumptions, 86.5% of farmers in the valley would demand an area yield insurance contract. However, demand falls when introducing loading and IRSA's, and demand predictions are sensitive to the level of risk aversion, wealth, the strength of the IRSA's and the presence of subsidies. My findings suggest that, in the research context, comprehensive information on household and institutional characteristics are key in performing quality ex-ante demand analyses of index insurance.
|Advisor:||Boucher, Stephen R.|
|Commitee:||Lybbert, Travis J., Smith, Aaron D.|
|School:||University of California, Davis|
|Department:||Agricultural and Resource Economics|
|School Location:||United States -- California|
|Source:||MAI 48/04M, Masters Abstracts International|
|Keywords:||Area yield insurance, Index insurance, Lambayeque, Peru, Risk|
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