The impacts of thresholds on risk behavior: What's wrong with index insurance?

Almost universally, implementers of index insurance for low income households have chosen to embed insurance with other interventions designed to improve productivity, with the insurance used almost entirely to make the other interventions possible. A common example is to use the insurance to allow farmers to have access to loans by reducing the probability of weather related defaults. A bundled loan/insurance implementation with overwhelming take-up rates had low insurance take-up rates when researchers unbundled the package, covering the loan default risk, so that the loans could be available without requiring insurance. If low income farmers are highly risk averse, why do they place so little value on risk reducing insurance once their access to productive inputs is secured? In general, why do index insurance implementers targeting the lowest income households nearly universally utilize insurance as a tool to increase productivity instead of using it to reduce variance? We provide a potential explanation driven by optimal risk behavior in the face of income thresholds, illustrating how models of risk aversion may not adequately represent the behavior of those with very low incomes. We show how variance reduction may not be the most important outcome for a low income farmer who lives near the poverty threshold. We show that if a farmer's goal is to avoid falling into a poverty trap, then the lower his income is, the less risk averse he becomes in the mean-variance utility maximization framework regarding the design of index insurance contracts. We begin this paper by introducing a mean-variance utility maximization framework, using a known joint distribution for the index and yield, and then we show how one's risk aversion changes when the mean-variance utility function is switched to a poverty trap avoidance utility function. We argue that one reason farmers don't always seek to minimize variance is that they may be very near a poverty trap threshold, and are therefore less willing to give up additional expected income in exchange for decreased income variance. In this case, it may be best for implementers to utilize insurance to unlock increases in productivity as opposed to variance reduction per se.Agricultural and Food Policy, Agricultural Finance, International Development, D80, O12, O16, Q14,

Shepherd's Dilemma

Recent outbreaks of Rift Valley Fever in sheep have led to boycotts of African livestock by Middle Eastern importers. To normalize trade, attempts have been made to apply new livestock forecasting and monitoring technologies. In this process, producers have exhibited a resistance in revealing livestock health information, a resistance that could jeopardize the information system and lead to further boycotts. We investigate the incentives governing this problem and model the most fundamental contract issues, those concerning reputation and credibility. Equilibrium contracts require that the buyer compensate the producer for private information to address the shepherd's dilemma of concealing livestock information (and facing continued boycotts) or revealing the information and being blacklisted.Livestock Production/Industries,

Index Insurance, Production Practices, and Probabilistic Climate Forecasts

The failure of the development of commercially viable traditional crop insurance products and innovations in financial markers has fed a renewed interest in the search for alternatives to help producers in developing countries manage their risk exposure. Salient among these is the proposal of several index insurance schemes against weather events. Among the basic tenets are that the presence of index insurance allows producers to intensify their operations and reduce the risks of default and hence may induce creditors to offer loans at affordable rates. The two factors combined are touted as key to help producers in developing countries escape poverty traps. Improvements in seasonal climate forecasts create challenges for the design and effective functioning of the insurance against climate risks. However, very little is known about potential synergies or conflicting impacts of these two institutions, and the interactions between them and input management decisions by producers. We find that insurance and forecast may have synergistic or conflicting effects on input decisions. In the presence of (state contingent) actuarially fair insurance, producers may prefer the forecast information not to be available, especially if the management options available do not result in sufficient changes in profitability. Perhaps surprisingly, we find that forecast information may induce producers to increase the amount of insurance purchased.Climate forecast, Index insurance, Input Decisions, Risk Management, Weather risks, Risk and Uncertainty,

TRANSITION OF AGRICULTURAL LAND OWNERSHIP AND USE

A natural propensity was found which indicates that most agricultural producers believe their land will be operated by one or more of their children when they retire. But results also indicate that producers will be responsive to selling their land for development if urban housing offers a higher return.Land Economics/Use,

HARITA IRI report to Oxfam America

The Horn of Africa Risk Transfer for Adaptation (HARITA) project is a holistic adaptation risk management project involving three main components: risk reduction, risk transfer, and prudent risk taking. The risk reduction component involves activities such as composting, water harvesting, planting trees, and seed cleaning, and interfaces closely with the Ethiopian Productive Safety Net Program (PSNP), a work for food program through which low income farmers are compensated for their labor in activities such as risk reduction

America and the World

Originally published in 1970. This volume presents a study of American foreign policy during the Cold War period, investigating the United States' involvement with the U.S.S.R., China, and communist parties throughout the world

Concepts of General and Limited War

It is a great pleasure to be back again and to discover how much more you seem to know since I left. I am going to assume that your general level of sophistication in strategic matters ls so great that I can dispense with this terrible semantic bind of defining general and limited war and assume that no very precise definitions are necessary in order to get us off the ground