Patterns of rainfall insurance participation in rural India

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This paper describes the contract design and institutional features of an innovative rainfall insurance policy offered to smallholder farmers in rural India, and presents preliminary evidence on the determinants of insurance participation. Insurance take-up is found to be decreasing in basis risk between insurance payouts and income fluctuations, increasing in household wealth and decreasing in the extent to which credit constraints bind. These results match with predictions of a simple neoclassical model appended with borrowing constraints. Other patterns are less consistent with the ‘benchmark’ mode, namely, measures of familiarity with the insurance vendor play a key role in insurance take-up decisions, and risk averse households are found to be less, not more, likely to purchase insurance. The authors suggest that these results in part reflect household uncertainty about the product itself, given their lack of experience with it.

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Xavier Gine, Robert Townsend, James Vickery

Number of pages: 

55

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