Risk, Insurance and Wages in General Equilibrium

Abstract

We estimate the general-equilibrium labor market effects of a large-scale randomized intervention in which we designed and marketed a rainfall index insurance product across three states in India. Marketing agricultural insurance to both cultivators and to agricultural wage laborers allows us to test a general-equilibrium model of wage determination in settings where households supplying labor and households hiring labor face weather risk. Consistent with theoretical predictions, we find that both labor demand and equilibrium wages become more rainfall sensitive when cultivators are offered rainfall insurance, because insurance induces cultivators to switch to riskier, higher-yield production methods. The same insurance contract offered to agricultural laborers smoothes wages across rainfall states by inducing changes in labor supply. Policy simulations based on our estimates suggest that selling insurance only to land-owning cultivators and precluding the landless from the insurance market (which is the current regulatory practice in India and other developing countries), makes wage laborers worse off relative to a situation where insurance does not exist at all.

Farms, Families, and Markets: New Evidence on Completeness of Markets in Agricultural Settings

“…Yotopolous and Lau, 1974; Barnum and Squire, 1979; Strauss, 1982, 1986; Singh, Squire and Strauss, 1986). 1 Recent studies that have their origins in this model have made important contributions to the study of distributional impacts of agricultural productivity shocks, technology adoption, and the operation of labor markets (Jayachandran, 2006; Suri, 2011; Kaur, 2015; Mobarak and Rosenzweig, 2014), risk sharing (Townsend, 1994), the impact of microcredit (Kaboski and Townsend, 2011), understanding intra-household resource allocation (Udry, 1996), property rights (Field, 2007), and child labor and household production (Akresh and Edmonds, 2011). More broadly, the effects of policies depend critically on whether or not economic decision-makers behave as if markets are complete (Singh, Squire and Strauss, 1986; Dillon and Barrett, 2015).…”

Experimental Methods in Survey Research in Demography

“…This resulted in reduced uncertainty among cultivators but increased uncertainty among agricultural wage laborers. This effect would not have been observed if the study had focused only on the impact of the RCT on cultivator choices (Mobarak and Rosenzweig, 2014). The point is not that equilibrium effects are inherently bad (or good) but, as is the case in observational studies, drawing on theory to identify potential equilibrium effects and designing experimental studies to explore the empirical importance of such effects is likely to have a substantial pay-off.…”

Protecting farmers from weather-based risk

“…Ghana [3] Andhra Pradesh [6] Tamil Nadu [6] Uttar Pradesh [6] Two studies ( [3] and [6]) randomly offered discounts to customers, generating enough data to estimate demand curves for weather index insurance.…”

“…In the three studies that measured changes in farmer behavior, farmers who bought insurance shifted production toward crops that were more sensitive to weather but more profitable on average [3] [5] [6].…”

“…Weather index insurance was first offered in the early 2000s, and it is now marketed to individual farmers in over fifteen countries. Randomized evaluations in Ethiopia in 2010 [1] and 2011 [2], Ghana [3], Andhra Pradesh, India in 2006 [4] and 2009 [5], Andhra Pradesh, Tamil Nadu, and Uttar Pradesh, India [6], Gujarat, India in 2007 [4] and 2009 [7], and Malawi [8] tested take-up of weather index insurance products. Three of these also measured the effects on agricultural production decisions [3] [5] [6].…”