Essays in Weather Insurance and Development PDF Download

Author: Ayako Matsuda
Publisher:
ISBN:
Category :
Languages : en
Pages : 98

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Weather index insurance has been attracting much attention from academics and policy makers. When deciding whether and how much insurance to obtain, farmers face a trade-off: while an increasing acre coverage reduces the weather risk, it increases the basis risk. This dissertation investigates the demand for rainfall index insurance in India. Chapter 1 presents the subsidy experiment that was conducted in India and describes the key variables collected. It offers directions for quantitative research using the analyzed dataset. In Chapter 2, I particularly focus on the relationships among basis risk, weather risk, and the risk aversion of potential insurance buyers. Based on the subsidy experiment, I develop a structural model, and estimate the risk aversion parameters. The estimated risk aversion is found to be consistent with the observed inelasticity of demand for many farmers. I also show that a heterogeneity of socio-economic characteristics affects the level of the estimated risk aversion. I find that age, education, and literacy are negatively correlated with the estimated risk aversion. Finally, I derive an aggregate demand and conduct a counterfactual analysis to quantify the effect of basis risk. I find that basis risk is important enough that only farmers within approximately 4km to a weather station can actually reduce the overall risk by purchasing this insurance.

Author: Alan Fuchs
Publisher:
ISBN:
Category :
Languages : en
Pages : 228

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This dissertation consists of three chapters that analyze the effects of social development programs on productivity, risk management strategies, and energy consumption among the poorest population in Mexico. Weather shocks have important negative impacts on poor rural households' livelihood as they are not only closer to subsistence and more vulnerable but also depend on the weather for survival. Nonetheless, due to high administrative costs and information problems insurance markets tend to leave this part of the population unprotected. Similarly, poor rural households usually make use of cheap yet inefficient and potentially harmful sources of energy for cooking, lighting, and heating their homes. This situation does not only affect their health and daily activities, but also keeps them trapped in poverty. In the following chapters I discuss several ways in which government action can in fact improve this population's well-being. The first chapter entitled "Drought and Retribution: Evidence from a large scale Rainfall-Indexed Insurance Program in Mexico" studies the effects of the recently introduced rainfall-indexed insurance on farmers' productivity, risk management strategies, and per capita income and expenditures in Mexico. Weather shocks are a major source of income fluctuation and most of the world's poor lack insurance coverage against them. In addition, the absence of formal insurance contributes to poverty traps as investment decisions are conflicted with risk management decisions: risk-averse farmers tend to under-invest and concentrate in the production of lower yielding yet safer crops. Recently, weather-indexed insurance has gained increased attention as an effective tool providing small-scale farmers coverage against aggregate shocks. However, there is little empirical evidence about its effectiveness. According to the Ministry of Agriculture, 80 percent of agricultural catastrophic risk in Mexico stems from droughts. Therefore, in 2003 it implemented weather-indexed insurance as a pilot in five counties in the Mexican State of Guanajuato, and by 2008 it already covered almost 1.9 million hectares representing 15 percent of rain-fed agricultural land. The main identification strategy takes advantage of the variation across counties and across time in which the insurance was rolled-out. We find that insurance presence in treated counties has significant and positive effects on maize productivity. In fact, we find that insurance presence at the county level increases maize yields by more than 5 percent. Similarly, we find that insurance presence at the county level has had a positive effect on rural households' per capita expenditure and income of a magnitude close to 8 percent. However, we find no significant relation between insurance presence and the number of hectares destined to maize production. The second chapter entitled "Voters Response to Natural Disasters Aid: Quasi-Experimental Evidence from Drought Relief Payment in Mexico" estimates the effect of a government climatic contingency transfer allocated through the recently introduced rainfall indexed insurance on the 2006 Presidential election returns in Mexico. Using the discontinuity in payment based on rainfall accumulation measured on local weather stations that slightly deviate from a pre-established threshold, we show that voters reward the incumbent presidential party for delivering drought relief compensation. We find that receiving indemnity payments leads to a significant increase in average electoral support for the incumbent party of approximately 7.6 percentage points. Our analysis suggests that the incumbent party is rewarded by disaster aid recipients and punished by non-recipients. This chapter provides evidence that voters evaluate government actions and respond to disaster spending contributing to the literature on retrospective voting. The third and final chapter entitled "Conditional Cash Transfers schemes and Households' Energy Response in Mexico" analyzes the relationship between income and energy use in poor households in Mexico using household expenditure surveys that were collected to evaluate the poverty alleviation program "Oportunidades". We argue that Oportunidades cash transfers provide an income shock that is exogenous to a household's energy demand, allowing us to estimate short-run and long-run income elasticities for energy use. Short-run estimates hold household's appliance stock constant and long-run estimates model the household's decision to acquire new appliances. As a general estimation strategy households' fixed-effects are included. We also use instrumental variable estimation and a matching difference-in-differences estimator to check for robustness and correct for pre-selection unbalances between treatment and control groups. Results suggest significant differences between long-run and short-run elasticities as households emerging from poverty become first-time purchasers of energy-using appliances. In particular, we find small and not significant effects of cash-transfers on short-run energy consumption expenditure, but find significant and important effects of cumulative conditional cash-transfers on appliance acquisition (i.e. refrigerators and gas stoves). This has important policy implication since poverty alleviation programs like Oportunidades conditional cash transfers program, although not evident in the short run, have significant effects on energy demand.

Author: Jing Cai
Publisher:
ISBN:
Category :
Languages : en
Pages : 270

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Some new technologies or financial products have the potential to dramatically improve economic development and household welfare, but adoption is often sub-optimally slow. In this dissertation, I explore the barriers to the diffusion of innovations, identify and assess potential ways to overcome these constraints, and evaluate the impact of innovation adoption on household behavior, using both experimental and non-experimental methods. Using data from a two-year randomized experiment in rural China, the first chapter studies the influence of social networks on the decision to adopt a new weather insurance product and the mechanisms through which social networks operate. In the first year, I provided financial education to a random subset of farmers and found a large social network effect on insurance take-up: for untreated farmers, having an additional friend receiving financial education raises take-up by almost half as much as obtaining financial education directly, a spillover effect equivalent to offering a 12% reduction in the average insurance premium. By varying the information available to subjects about their peers' take-up decisions and using randomized default options, I show that the positive social network effect is not driven by scale effects, imitation, or informal risk-sharing, but instead by the diffusion of insurance knowledge. One year later, social networks continue to affect insurance demand: observing an above-median share of friends receiving payouts increases insurance take-up at a rate equivalent to about 50% of the impact of receiving payouts directly. I also find that social network effects are larger in villages where households are more strongly connected, and when the people who receive financial education first are more central in the social network. The second chapter is based on a coauthored paper with Changcheng Song, "Insurance Take-up in Rural China: Learning from Hypothetical Experience". This chapter uses a novel experimental design to test for the role of experience and information in insurance take-up in rural China, where weather insurance was a new and highly subsidized product. We randomly select a group of poor households to play insurance games and find that it improves the actual insurance take-up by 48%. In order to determine the mechanism behind this effect, we test whether it is due to: (1) changes in risk attitudes, (2) changes in the perceived probability of future disasters, (3) learning the objective benefits of insurance, or (4) hypothetical experience of disaster. We show that the effect cannot be explained by mechanisms (1) to (3), and that the experience acquired in playing the insurance game matters. We develop a simple model in which agents give less weight to disasters and benefits which they experienced infrequently. Our estimation also suggests that compared with experience with real disasters in the previous year, experience gained in the insurance game played recently has a stronger effect on the actual insurance take-up, implying that learning from experience displays a strong recency effect. In the third chapter, I take advantage of a natural experiment and a rich household-level panel dataset to test the impact of an agricultural insurance program on household level production, borrowing, and saving. The empirical strategy includes both difference-in-difference and triple difference estimations. I find that first, introducing insurance increases the production area of insured crops by around 20%, and it decreases production diversification; second, provision of insurance raises the credit demand by 25%; third, it decreases the household saving by more than 30%; fourth, the effect of insurance policy on borrowing persists in the long-run, while that on saving is significant only in the medium-run; fifth, the impact of insurance is bigger on larger farmers, and households with lower migration remittance.

Author: Leonardo Francisco Sánchez Aragón
Publisher:
ISBN:
Category :
Languages : en
Pages :

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In this dissertation we address practical issues in designing weather insurance contracts for risk management in developing countries in three different scenarios. First, we develop an innovative contract design strategy based on agronomic considerations that can be implemented in situations where only short and/or aggregate data series are available. We attempt to mitigate both the aggregate nature of yield data and the need for data-demanding analysis by looking at areas sharing the same growing conditions and using agronomic requirements to specify contract parameters. We find that the proposed contracts do not achieve the same degree of risk reduction as the contracts that can be constructed using no data limitations, but they do provide meaningful risk protection and typically at lower premiums. The implication is that the proposed methodology can be used to design weather derivatives for developing countries, where paucity of data often renders the conventional design approaches unworkable. The second essay aims to derive a general-form optimal payoff of an index contract that takes into account potentially nonlinear dependence between the index underlying the contract and the loss that is insured. We find that the quasi-linear contract payoff structure may not be the optimal choice if the dependence between the index and the yield/revenue is nonlinear. The implication is that the proposed methodology can help to improve risk-reducing capabilities of weather derivatives particularly in situations where the effect of weather on yield is complex and not obvious. The third essay analyzes the use of weather derivatives in managing water supply risk arising in making water allocation decisions. The specific application is developed for the Alto Rio Lerma Irrigation District (ARLID) in the state of Guanajuato in Mexico. We argue that incorporation of weather derivatives in water allocation decisions can improve overall well-being of producers and allow shift water allocations from the wet to the dry season with the assumption that the wet season farmers can cope with the risk of water shortages by using weather derivatives. We find that use of weather derivatives does lead to better water allocation policies that allow the representative farmer to reach higher levels of utility. The implication is that introduction of weather derivatives can help to improve water management decisions in developing countries where agriculture heavily depends on irrigation and can be severely affected by extreme weather events. The electronic version of this dissertation is accessible from http://hdl.handle.net/1969.1/152664

Author: Florence Lwiza
Publisher:
ISBN:
Category :
Languages : en
Pages :

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In Uganda, the past five decades have been characterized by increasing temperatures, longer dry seasons, changes in the timing of rainfall with extreme events such as floods and heavy rainstorms, all of which have adverse effects on the livelihood of the rural farming community. Several strategies have been recommended for adaptation and mitigation of negative effects arising from changing weather conditions, including migration, use of weather index insurance, and changes in farm production practices, among others. However, the usability and effectiveness of the strategies are influenced by economic, social, biophysical and farmers' behavioral factors that are examined in the three essays of this study. Given the importance of weather and labor to rural and agricultural-based economies, the first essay examines the effect of weather anomalies on the likelihood that workers migrate from rural and urban areas. By matching household survey data with weather data, and assuming exogeneity of weather variables, the effects are identified by exploiting the spatial heterogeneity of weather conditions and worker characteristics. The results remain robust to alternative model specifications, all of which show a nonlinear effect of weather anomalies on the likelihood of migration of workers from rural areas. The results show that precipitation extremes reduce the likelihood of labor migration whereas temperature extremes increase the likelihood of labor migration. This research contributes to the burgeoning literature on weather-induced migration, and the findings underscore the need to build resilience for workers. The second essay analyzes the critical temperature for coffee yield reduction and whether the effects for single-cropped coffee farms differ from those that are intercropped with bananas as shade plants. Using panel data for coffee production and weather, I exploit the spatial and temporal variations in temperature and precipitation to estimate the effects. Estimation of random-effects regression models shows a nonlinear effect of temperature and precipitation on the yield for coffee with extreme temperatures greater than 28°C resulting in yield reductions. A sensitivity analysis predicts that increases in temperature results in reductions in yield, but the reductions are less for coffee farms that are intercropped with bananas. The findings can be used to inform policy decisions and research to design interventions that reduce production risks arising from weather changes. The third essay analyzes factors that affect the adoption and renewal of weather index-based insurance contracts. It also examines farmer preferences for attributes and types of index insurance contracts. Given that the use of index insurance is relatively new in Uganda and the market is not yet well developed, the study makes use of data collected through choice laboratory experiments conducted in simulated insurance markets in Western and Central Uganda. Discrete choice models were used to analyze the data and the results showed that the ambiguity of insurance contracts reduces the likelihood of the adoption of insurance. The results also show that farmers have a higher preference for insurance offered through farmer groups, as opposed to insurance offered to individuals. The study contributes to the literature on behavioral and product-specific factors that affect the adoption of index-based insurance.

Author: Min Su Jun
Publisher:
ISBN:
Category :
Languages : en
Pages :

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In Essay 1, I examine the effects of systemic weather shocks on agricultural producers, agricultural lenders, and rural communities in the northern Malawi and the potential benefits of using weather index insurance as a catastrophic risk management tool. To this end, I develop an agent-based model (ABM) of a hypothetical rural community and the model is calibrated to study the northern Malawi area. I simulate the system-wide impacts of catastrophic weather events and how weather index insurance can be used to mitigate adverse impacts of these events. The model generates results that are consistent with the theoretical and empirical findings that have been published to date on the impacts of weather index insurance when used to support agricultural credit. My simulations also generate novel findings regarding the system-wide impacts of catastrophic weather shocks and the potential benefits of index insurance. In particular, I find that if financial institutions purchase index insurance, they will be able to supply significant extra credit only when the area faces a similar or more severe drought that occurs one in fifty years according to the historical record. In Essay 2, I examine the potential benefits of index insurance by answering more detailed questions. The first question addressed is whether financial institutions have economic motivation to supply additional credit to households if they insure their portfolios using weather index insurance. I find that financial institutions can expect higher profits when utilizing indemnities to supply additional credit than when just holding them. The second question addressed is whether insurance can increase financial inclusion of marginal smallholder households. Specifically, I test whether insuring loan portfolios against weather catastrophes can promote reduction of interest rates offered by banks to smallholder farmers. I find that meso-index insurance could promote reduction of the interest rates for the borrower classes that have the lowest credit rating. Lastly, I test whether a counter-cyclical capital requirement can boost the systemic benefits of meso-index insurance. Due to the pressure on credit supply from the capital requirement and the higher interest rates needed to cover insurance premiums, synergies between insurance and counter-cyclic capital requirement policies do not appear to exist. In Essay 3, I estimate oligopolistic power of major U.S. grain companies which might originate from their oligopsonistic positions to farmers. By extending the linear-quadratic model developed by Karp and Perloff (1989, 1993a, 1993b), the market conduct parameter is estimated in the open loop and the feedback equilibria. In the grain-processing sector, firms’ oligopoly power originates from the oligopolistic power exerted by firms over farmers. Thus, unlike the existing literature, an output quantity is expressed with the input (grain) quantity variable under assumption of CRS production technology. Each firm’s share of storage capacity is taken as a proxy of the firm’s input procurement. Although my result reject the hypothesis of perfect collusion, the do not reject the hypotheses of price taking behavior and the existence of a Nash-Cournot equilibrium.

Author: Tatyana Deryugina
Publisher:
ISBN:
Category :
Languages : en
Pages : 115

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This thesis examines various aspects of environmental economics. The first chapter estimates how individuals' beliefs about climate change are affected by local weather fluctuations. Climate change is a one-time uncertain event with no opportunities for learning; the belief updating process may not be fully Bayesian. Using unique survey data on beliefs about the occurrence of the effects of global warming, I estimate how individuals use local temperature fluctuations in forming these beliefs. I test for the presence of several well-known psychological heuristics and find strong evidence for representativeness, some evidence for availability and no evidence for associativeness. I find that very short-run temperature fluctuations (1 day - 2 weeks) have no effect on beliefs about the occurrence of global warming, but that longer-run fluctuations (1 month - 1 year) are significant predictors of beliefs. Only respondents with a conservative political ideology are affected by temperature abnormalities. In the second chapter, I examine the economic impacts of natural disasters by estimating the effect of hurricanes on US counties' economies 0-10 years after landfall. Overall, I find no substantial changes in a county's population, earnings, or the employment rate. The largest empirical effect of a hurricane is observed in large increases in government transfer payments to individuals, such as unemployment insurance. The estimated magnitude of the extra transfer payments is large. While per capita disaster aid averages $356 per hurricane in current dollars, I estimate that in the eleven years following a hurricane an affected county receives additional non-disaster government transfers of $67 per capita per year. Private insurance-related transfers over the same time period average only $2.4 per capita per year. The fiscal costs of natural disasters are thus much larger than the cost of disaster aid alone. Because of the deadweight loss of taxation and moral hazard concerns, the benefits of policies that reduce disaster vulnerability, such as climate change mitigation and removal of insurance subsidies, are larger than previously thought. Finally, the substantial increase in non-disaster transfers suggests that the lack of changes in other economic indicators may be in part due to various social safety nets. In the third chapter, I estimate the extent of adverse selection in area yield insurance. Despite a long-run decrease in developed countries' vulnerability to weather shocks, agriculture worldwide remains susceptible to weather fluctuations. If climate change increases the frequency and intensity of extreme weather events, as it is predicted to do, food prices will likely become more volatile. A well-functioning insurance market is key to keeping the agricultural sector stable. I discuss the institutional and empirical features of the US crop insurance market. I outline the ways in which market designers have attempted to minimize adverse selection and moral hazard, as well as the remaining ways in which the market remains vulnerable to these. I then test for a particular form of adverse selection: whether public information (last year's average yield in the county) that is not explicitly priced by crop insurance companies predicts takeup of area yield insurance plans. I find no evidence that the recent yield influences takeup. I then perform another reduced-form test, using end-of-growing season yields as predictors of insurance takeup at the beginning of the growing season, and find that area yield insurance takeup is higher when average yields are higher. This suggests that the net selection into area yield plans favors providers, not buyers of insurance. In some specifications, the total demand for crop insurance is affected by current and past yields as well, potentially due to changes in the desirability of other plans.

Author: Molly E. Hellmuth
Publisher:
ISBN: 9780972925259
Category : Climatic changes
Languages : en
Pages : 112

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This publication examines the use of index insurance to help reduce vulnerability and poverty and adapt to climate change. Experience in index insurance to-date has been limited to individual case studies, which show promise of lessening the impacts of climate shocks, and enabling investment and growth in the agriculture sector. However, these cases have also uncovered significant questions that must be answered in order to start implementing index insurance at a scale relevant to attaining meaningful development impacts. The publication looks at the technical and operational challenges that currently limit the growth and spread of index insurance. It highlights a number of case studies of the various applications of index insurance across the world.

Author: Ceballos, Francisco
Publisher: Intl Food Policy Res Inst
ISBN:
Category : Social Science
Languages : en
Pages : 4

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Book Description
As climate variability gains prominence in the international policy agenda, public and private sectors alike are increasingly considering strategies to cope with its economic and social consequences. In turn, the general public—faced with a growing number of extreme weather events and natural hazards—is beginning to demand concrete action. One sector where climate variability and its associated risk have the most damaging impact is the rural economy, in particular smallholder farmers. This brief outlines some of the adverse effects that climate variability has on the rural economy and describes how different insurance mechanisms can contribute to reducing vulnerability and increasing resilience to weather risks.

Author: Ashley Dawson
Publisher: Verso Books
ISBN: 1784780367
Category : Nature
Languages : en
Pages : 385

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Book Description
A cutting exploration of how cities drive climate change while being on the frontlines of the coming climate crisis How will climate change affect our lives? Where will its impacts be most deeply felt? Are we doing enough to protect ourselves from the coming chaos? In Extreme Cities, Ashley Dawson argues that cities are ground zero for climate change, contributing the lion’s share of carbon to the atmosphere, while also lying on the frontlines of rising sea levels. Today, the majority of the world’s megacities are located in coastal zones, yet few of them are adequately prepared for the floods that will increasingly menace their shores. Instead, most continue to develop luxury waterfront condos for the elite and industrial facilities for corporations. These not only intensify carbon emissions, but also place coastal residents at greater risk when water levels rise. In Extreme Cities, Dawson offers an alarming portrait of the future of our cities, describing the efforts of Staten Island, New York, and Shishmareff, Alaska residents to relocate; Holland’s models for defending against the seas; and the development of New York City before and after Hurricane Sandy. Our best hope lies not with fortified sea walls, he argues. Rather, it lies with urban movements already fighting to remake our cities in a more just and equitable way. As much a harrowing study as a call to arms Extreme Cities is a necessary read for anyone concerned with the threat of global warming, and of the cities of the world.