The dual role of insurance in input use: Mitigating risk versus curtailing incentives

Davide Pietrobon

Journal of Development Economics, 2024, vol. 166, issue C

Abstract: Insurance can encourage the use of risk-increasing inputs, but it can also decrease people’s incentives to exert effort when the latter is difficult to monitor. This effort reduction can be associated with a decrease in the use of effort-complementary inputs. I study a model of risk-sharing that allows for both effects of insurance on input use and use the latest ICRISAT panel to structurally estimate it. Median fertilizer use is almost three times higher under no sharing than under full insurance for reasonable levels of risk aversion. A subsidy that halves fertilizer prices increases farmers’ welfare by 37% in consumption-equivalent terms.

Keywords: Insurance; Risk; Private information; Effort; Agriculture; Fertilizer; Complementarity (search for similar items in EconPapers)
JEL-codes: O12 O13 O33 Q16 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:166:y:2024:i:c:s0304387823001591

DOI: 10.1016/j.jdeveco.2023.103203

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