Risk sharing mechanisms in rural India

In Laura's own words

My PhD research focuses on the implications of risk-sharing mechanisms and access to information for the welfare of smallholder farmers in Gujarat, India. The welfare of most low-income agrarian households in developing countries is severely constrained by risk. While informal insurance mechanisms to cope with such risks are prevalent, they are insufficient in the face of aggregate-level shocks such as drought and flood. Over the last decade, weather insurance has been promoted as a potential tool to help smallholder farmers cope with rainfall variation. To contribute to our understanding of the benefits and limitations of weather insurance for farmer welfare, I focus on two dimensions of this topic that may offer insights into how to improve the design and marketing of future weather insurance products.

First, I am interested the extent to which access to information may explain low take-up of weather insurance, a microinsurance product to insure the rural poor against drought and flood. Neoclassical economic theory predicts that risk-averse and utility-maximizing farmers will insure themselves against crop failure due to rainfall variation, but take-up of such weather insurance remains low. The first essay in my dissertation explores via a lab experiment with smallholder farmers in India to what extent differential access to information may account for this conundrum. Three channels through which access to information may influence decisions to purchase insurance are disentangled: (i) social learning; (ii) informal risk-sharing and (iii) free-riding.

Farmer welfare, however, is not only affected by how access to information affects take-up, but also by the subsequent effect of information on investment choices. In my second essay, I thus explore the varying implications of access to information in the context of group versus individual insurance structures for smallholder farmers' ex-post investment decisions. This is based on the insight that - similar to joint liability micro credit with asymmetric information - group weather insurance could be subject to ex-ante moral hazard. A farmer may seek high-risk investments when able to hide these choices from the group and attribute any crop losses to rainfall deficiencies (in order to obtain a larger share of the group payout). Vice versa, under peer monitoring and approval, insured farmers may choose less risky investments and achieve lower average profits. My second experiment tests the effect of variations in insurance design and the level of monitoring on such ex-post investment decisions.