Working Paper | HBS Working Paper Series | 2013

How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment

by Shawn Cole, Xavier Gine and 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 to shift production towards higher-return but higher-risk cash crops, particularly among educated farmers. 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 payouts improve trust in the product, and that farmers shield payouts from claims by relatives.

Keywords: Risk Management; Production; Weather and Climate Change; Insurance; Emerging Markets; Agribusiness; Insurance Industry; Agriculture and Agribusiness Industry; India;

Citation:

Cole, Shawn, Xavier Gine, and James Vickery. "How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment." Harvard Business School Working Paper, No. 13-080, March 2013. (Revised September 2014.)