Weather Index Drought Insurance: An Ex Ante Evaluation for Millet Growers in Niger

Antoine Leblois, Philippe Quirion, Agali Alhassane and Seydou Traoré

Environmental & Resource Economics, 2014, vol. 57, issue 4, 527-551

Abstract: In the Sudano-Sahelian region, which includes South Niger, the inter-annual variability of the rainy season is high and irrigation is limited. As a consequence, bad rainy seasons have a massive impact on crop yield and regularly result in food crises. Traditional insurance policies based on crop damage assessment are not available because of asymmetric information and high transaction costs compared to the value of production. We assess the risk mitigation capacity of an alternative form of insurance which has been implemented at a large scale in India since 2003: insurance based on a weather index. We compare the efficiency of various weather indices to increase the expected utility of a representative risk-averse farmer. We show the importance of using plot-level yield data rather than village averages, which bias results due to the presence of idiosyncratic shocks. We also illustrate the need for out-of-sample estimations in order to avoid overfitting. Even with the appropriate index and assuming substantial risk aversion, we find a limited gain of implementing insurance, which roughly corresponds to, or slightly exceeds, the cost observed in India for implementing such insurance policies. However, when we separately treat the plots with and without fertilisers separately, we see that the benefit of insurance is slightly higher in the former case. This suggests that insurance policies may slightly increase the use of risk-increasing inputs such as fertilisers and improved cultivars, and hence improve average yields, which remain very low in the region. Copyright Springer Science+Business Media Dordrecht 2014

Keywords: Agriculture; Weather; Index-based insurance; O12; Q12; Q18 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Working Paper: Weather index drought insurance: an ex ante evaluation for millet growers in Niger (2011)
Working Paper: Weather-index drought insurance: an ex ante evaluation for millet growers in Niger (2011)
Working Paper: Weather-index drought insurance: an ex ante evaluation for millet growers in Niger (2011)
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DOI: 10.1007/s10640-013-9641-3

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