Risk-Sharing and Land Misallocation

Davide Pietrobon and Alessandro Ruggieri

No 1565, Working Papers from Barcelona School of Economics

Abstract: We study the impact of incomplete consumption risk-sharing on land misallocation in rural economies. We develop a general equilibrium model of land cultivation choices, where heterogeneous agricultural households face idiosyncratic output shocks and insure themselves by participating in a risk-sharing arrangement. Incomplete insurance distorts households' land cultivation choices, leading them away from maximizing expected incomes and resulting in land misallocation. Using the latest ICRISAT panel data from rural India, we quantify the losses attributable to limited risk-sharing. Completing insurance markets leads to output and welfare gains of 19% and 29%, respectively. Improving the functioning of consumption insurance markets can yield gains comparable to those achieved by removing distortions in factor markets.

Keywords: agriculture; misallocation; productivity; risk-sharing; welfare (search for similar items in EconPapers)
JEL-codes: D52 D61 O11 Q12 (search for similar items in EconPapers)
Date: 2026-03
New Economics Papers: this item is included in nep-agr
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