Drought and Retribution: Evidence from a Large-Scale Rainfall-Indexed Insurance Program in Mexico

46 Pages Posted: 20 Apr 2016

See all articles by Alan Fuchs

Alan Fuchs

World Bank - Poverty Reduction and Economic Management Network (PRMVP)

Hendrik Wolff

University of Washington - Department of Economics

Date Written: February 16, 2016

Abstract

Although weather shocks are a major source of income fluctuation, most of the world's poor lack insurance coverage against them. Absence of formal insurance contributes to poverty traps, as investment decisions are conflicted with risk management ones: risk-averse farmers tend to underinvest and produce lower yielding yet safer crops. In the past few years, weather index insurance has gained increasing attention as an effective tool to provide small-scale farmers coverage against aggregate shocks. However, there is little empirical evidence about its effectiveness. This paper studies the effect of the recently introduced rainfall-indexed insurance on farmers' productivity, risk management strategies, as well as per capita income and expenditure in Mexico. The identification strategy takes advantage of the variation across counties and across time in which the insurance was rolled-out. The analysis finds that the presence of insurance in treated counties has significant and positive effects on maize productivity. Similarly, there is a positive association between the presence of insurance in the municipality and rural households' per capita expenditure and income, although no significant relation is found between the presence of insurance and the number of hectares destined for maize production.

Keywords: ICT Economics, Disaster Management, Hazard Risk Management, Food Security, Nutrition, Climate Change and Agriculture, Social Risk Management

Suggested Citation

Fuchs, Alan and Wolff, Hendrik, Drought and Retribution: Evidence from a Large-Scale Rainfall-Indexed Insurance Program in Mexico (February 16, 2016). World Bank Policy Research Working Paper No. 7565, Available at SSRN: https://ssrn.com/abstract=2733401

Alan Fuchs (Contact Author)

World Bank - Poverty Reduction and Economic Management Network (PRMVP) ( email )

Washington, DC 20433
United States

Hendrik Wolff

University of Washington - Department of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States

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