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Agricultural activity is inherently risky, and smoothing consumption across years or seasons is a significant challenge for agrarian households in developing countries. Surprisingly, rainfall insurance markets do not function well even in areas where farmers face large weather risks. Recent studies show that take-up rates are extremely low even when actuarially fair rainfall insurance contracts are offered. This project seeks to understand why Indian farmers exposed to rainfall risk are reluctant to purchase formal insurance products that mitigate those risks. The project studies (i) how informal risk sharing mediates the demand for index insurance, (ii) whether index insurance or informal indemnification allows farmers to invest in risky technologies, and (iii) the general equilibrium effects of offering insurance contracts to cultivators or to agricultural labourers.
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