Geostatistics, Basis Risk, and Index Insurance

Michael Norton, Stephen Boucher and Leslie Verteramo Chiu

No 205755, 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California from Agricultural and Applied Economics Association

Abstract: This paper describes the application of geostatistics to weather index insurance in order to systematically analyze spatial basis risk inherent in index insurance contracts. The notion of spatial autocorrelation is in general overlooked by index insurance practitioners, but has profound implications for the effectiveness of the insurance offered. The analysis shows that it is possible to offer contracts from multiple weather stations to a single farmer, and that doing so will likely reduce the basis risk from a single contract. The two major implications of the paper are 1) that index insurance should be offered in more flexible contracts that allow farmers to hedge their production according to their perceptions of basis risk and their appetites for risk, and 2) the tradeoff between local (yield) correlation and spatial correlation needs to be more carefully considered, as it may even be better to offer contracts with poor yield correlation if they can include more spatial coverage.

Keywords: Research Methods/ Statistical Methods; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 13
Date: 2015
New Economics Papers: this item is included in nep-ias and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://ageconsearch.umn.edu/record/205755/files/Norton_AAEA_2015.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea15:205755

DOI: 10.22004/ag.econ.205755

Access Statistics for this paper

More papers in 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California from Agricultural and Applied Economics Association Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search ().