Forecasting Profitability

47 Pages Posted: 17 Aug 2013 Last revised: 1 May 2022

See all articles by Mark R. Rosenzweig

Mark R. Rosenzweig

Yale University - Economic Growth Center; Yale University - Cowles Foundation

Christopher Udry

Northwestern University

Multiple version iconThere are 2 versions of this paper

Date Written: August 2013

Abstract

We use newly-available Indian panel data to estimate how the returns to planting-stage investments vary by rainfall realizations. We show that the forecasts significantly affect farmer investment decisions and that these responses account for a substantial fraction of the inter-annual variability in planting-stage investments, that the skill of the forecasts varies across areas of India, and that farmers respond more strongly to the forecast where there is more forecast skill and not at all when there is no skill. We show, using an IV strategy in which the Indian government forecast of monsoon rainfall serves as the main instrument, that the return to agricultural investment depends substantially on the conditions under which it is estimated. Using the full rainfall distribution and our profit function estimates, we find that Indian farmers on average under-invest, by a factor of three, when we compare actual levels of investments to the optimal investment level that maximizes expected profits. Farmers who use skilled forecasts have increased average profit levels but also have more variable profits compared with farmers without access to forecasts. Even modest improvements in forecast skill would substantially increase average profits.

Suggested Citation

Rosenzweig, Mark Richard and Udry, Christopher, Forecasting Profitability (August 2013). NBER Working Paper No. w19334, Available at SSRN: https://ssrn.com/abstract=2311583

Mark Richard Rosenzweig (Contact Author)

Yale University - Economic Growth Center ( email )

Box 208269
New Haven, CT 06520-8269
United States
203-432-3620 (Phone)

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Christopher Udry

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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