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Federal Reserve Bank of New York
Staff Reports
How does risk management influence production decisions? evidence from a field experiment
Shawn Cole
Xavier Gine
James Vickery
Abstract

Weather is a key source of income risk, particularly in emerging market economies. This paper uses a randomized controlled trial involving a sample of Indian farmers to study how an innovative rainfall insurance product affects production decisions. We find that insurance provision induces farmers—particularly educated farmers—to shift production toward higher-return but higher-risk cash crops. Our results support the view that financial innovation can mitigate the real effects of uninsured production risk. Addressing the puzzle of low adoption, we show that payouts improve trust in the product and that farmers shield payouts from claims by relatives.


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Shawn Cole & Xavier Gine & James Vickery, How does risk management influence production decisions? evidence from a field experiment, Federal Reserve Bank of New York, Staff Reports 692, 01 Sep 2014.
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Keywords: risk management; financial constraints
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