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Theme 4: Underwriting Area-Based Yield Insurance to Eliminate ‘Risk Rationing’ and Crowd-In Credit Supply and Demand

Topic :

Recent theoretical and empirical evidence suggests that risk (especially covariant risk that is correlated across producers) may discourage both the supply of agricultural credit and the willingness of small holders to utilize available credit and enjoy the higher expected incomes credit could make available to them. One possible resolution to this problem is to remove risk from the system by independently insuring it. However, conventional (all hazard) crop insurance has in almost every instance been rendered financially unsustainable by moral hazard and adverse selection problems.

This parameter instead analyzes an area-based yield insurance scheme (where area yields are estimated using readily available weather information). While such insurance does not protect the farmer from all risks, our econometric analysis shows that it could have substantial value to the producer and could also crowd-in credit supply from lenders reluctant to carry too much covariant risk in their loan portfolios.

We close by arguing that present and past public good failures justify public intervention in this area and analyze the feasibility of a publicly funded scheme to underwrite the costs and uncertainties associated with area based yield insurance.

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