Quantitative Economics: Nov, 2015, Volume 6, Issue 3

The impact of weather insurance on consumption, investment, and welfare

Francesca de Nicola

I develop and estimate a dynamic stochastic optimization model to assess the impact of weather insurance on the consumption, investment, and welfare of farmers in developing countries. Weather insurance has the potential to provide large welfare gains, equivalent to a permanent increase in consumption of almost 17%. Moreover, it can allow for the adoption of riskier but more productive seeds, further enhancing welfare. The interplay with other uninsured risks, the presence of liquidity constraints, basis risk, and loading factor on the insurance premium may account for the low take‐up that is often empirically observed.

Keywords. Weather insurance welfare technology adoption G22 O12 O13 O16 O33 Q14

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