Wednesday, July 27, 2011

Lessons from the Agricultural Economics Meetings

I just returned from the Agricultural and Applied Economics Association meetings in Pittsburgh.

One session I attended was on crop insurance, while this may not sound exciting insurance is a key part of international development. The basic conceptual theory is that poor farmers have two choices, they can grow a low yield and low risk crop or grow a higher yield high risk crop. Extremely poor farmers often don't take the risk of high yield crops, because one bad season can be a matter of life and death. Crop insurance could be offered to cover bad harvests. The difficulty is that insurance has to prevent moral hazard (if you have insurance why work hard on your harvest) so insurance is often tied to things out of the farmers control like rainfall or average harvest of many farmers.

One cited paper at the session by Gine and Yang tested if farmers in Malwai would buy insurance when offered as part of loans. They found that making insurance a requirement of getting a loan, made people less likely to borrow. From the abstract

"There is suggestive evidence that reduced take-up of the insured loan was due to farmers already having implicit insurance from the limited liability clause in the loan contract: insured loan take-up was positively correlated with farmer education, income, and wealth, which may proxy for the individual's default costs. By contrast, take-up of the uninsured loan was uncorrelated with these farmer characteristics."

I think the take away from the session is that insurance could potentially help but thus far it has been hard to find a way to get farmers to buy into it. The work in the session and above suggests making contingent loans might be the way to go.

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