Index insurance and basis risk: A reconsideration

Erik Lichtenberg and Eva Iglesias

Journal of Development Economics, 2022, vol. 158, issue C

Abstract: Index insurance has been seen as an important tool for managing the risks faced by farmers in developing countries but uptake has been disappointingly low. Basis risk is often cited as one of the main reasons for the lack of uptake. We investigate the role of basis risk in greater depth by considering contracts that allow farmers to choose the level of the index that triggers an indemnity in addition to coverage. We show that risk averse farmers will select trigger levels to protect against catastrophic outcomes, even if downside basis risk increases. A numerical simulation model bears out our theoretical results.

Keywords: Risk; Agricultural insurance; Index insurance; Development; Rural financial markets (search for similar items in EconPapers)
JEL-codes: D81 O16 Q14 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:158:y:2022:i:c:s0304387822000505

DOI: 10.1016/j.jdeveco.2022.102883

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