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Index Insurance, Probabilistic Climate Forecasts, and Production

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Publication date
13/03/2008
Number of Pages
32
Language:
English
Type of Publication:
Working Papers & Briefs
Focus Region:
Global
Focus Topic:
Climate / Weather / Environment
Market / Trade
Institutions / Organizations
Type of Risk:
Market-related
Weather & Climate related
Policy & institutional
Type of Risk Managment Option:
Risk transfer
Commodity:
Crops
Other
Livestock
Author
Miguel Carriquiry, Daniel E. Osgood
Organization
Center for Agricultural and Rural Development (CARD)

Index insurance and probabilistic seasonal forecasts are becoming available in developing countries to help farmers manage climate risks in production. Although these tools are intimately related, work to formalize the connections between them is lacking. We investigate the relationship between the risk management tools through a model of input choice under uncertainty, forecasts, and insurance. While it is possible for forecasts to undermine insurance, we find that when contracts are appropriately designed, there are important synergies between forecasts, insurance, and effective input use. Used together, these tools overcome barriers preventing the use of imperfect information in production decision making.