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How Does Risk Management Influence Production Decisions? : Evidence from a Field Experiment / Shawn Cole
World Bank Open Knowledge Repository (formerly "World Bank E-Library Publications") Available online
View online- Format:
- Book
- Government document
- Author/Creator:
- Cole, Shawn
- Series:
- Policy research working papers.
- World Bank e-Library.
- Language:
- English
- Subjects (All):
- Climate Change Economics.
- Debt Markets.
- Finance and Financial Sector Development.
- Household finance.
- Insurance.
- Insurance Law.
- Labor Policies.
- Non Bank Financial Institutions.
- Private Sector Development.
- Risk.
- Underinvestment.
- Local Subjects:
- Climate Change Economics.
- Debt Markets.
- Finance and Financial Sector Development.
- Household finance.
- Insurance.
- Insurance Law.
- Labor Policies.
- Non Bank Financial Institutions.
- Private Sector Development.
- Risk.
- Underinvestment.
- Physical Description:
- 1 online resource (55 pages)
- Other Title:
- How Does Risk Management Influence Production Decisions?
- Place of Publication:
- Washington, D.C., The World Bank, 2013
- System Details:
- data file
- Summary:
- Weather is a key source of income risk for many firms and households, particularly in emerging market economies. This paper uses a randomized controlled trial approach to study how an innovative risk management instrument for hedging rainfall risk affects production decisions among a sample of Indian agricultural firms. The analysis finds that the provision of insurance induces farmers to shift production toward higher-return but higher-risk cash crops, particularly among more-educated farmers. The results support the view that financial innovation may help mitigate the real effects of uninsured production risk. In a second experiment, the study elicits willingness to pay for insurance policies that differ in their contract terms, using the Becker-DeGroot-Marshak mechanism. Willingness-to-pay is increasing in the actuarial value of the insurance, but substantially less than one-for-one, suggesting that farmers' valuations are inconsistent with a fully rational benchmark.
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