Drought and Retribution

Although weather shocks are a major
source of income fluctuation, most of the world's poor
lack insurance coverage against them. Absence of formal
insurance contributes to poverty traps, as investment
decisions are conflicted with risk management ones:
risk-averse farmers tend to underinvest and produce lower
yielding yet safer crops. In the past few years, weather
index insurance has gained increasing attention as an
effective tool to provide small-scale farmers coverage
against aggregate shocks. However, there is little empirical
evidence about its effectiveness. This paper studies the
effect of the recently introduced rainfall-indexed insurance
on farmers' productivity, risk management strategies,
as well as per capita income and expenditure in Mexico. The
identification strategy takes advantage of the variation
across counties and across time in which the insurance was
rolled-out. The analysis finds that the presence of
insurance in treated counties has significant and positive
effects on maize productivity. Similarly, there is a
positive association between the presence of insurance in
the municipality and rural households' per capita
expenditure and income, although no significant relation is
found between the presence of insurance and the number of
hectares destined for maize production.