Index insurance and basis risk

A reconsideration

Bibliographic Data

ID22902162
AuthorsErik Lichtenberg (0000-0003-0619-6254, University of Maryland, College Park, corresponding author), Eva Iglesias (0000-0002-7086-7553, Universidad Politécnica de Madrid)
Year2022
Volume158
Pages102883
Publication date2022-09-01
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueJournal of Development Economics (JOURNAL)
Journal identifiersISSN: 0304-3878 • E-ISSN: 1872-6089
PublisherElsevier BV (PUBLISHER)
DOI10.1016/j.jdeveco.2022.102883
OpenAlexW4225936952
LanguageEN
Citations received2
References cited20

Index insurance has been seen as an important tool for managing the risks faced by farmers in developing countries but uptake has been disappointingly low. Basis risk is often cited as one of the main reasons for the lack of uptake. We investigate the role of basis risk in greater depth by considering contracts that allow farmers to choose the level of the index that triggers an indemnity in addition to coverage. We show that risk averse farmers will select trigger levels to protect against catastrophic outcomes, even if downside basis risk increases. A numerical simulation model bears out our theoretical results.

Actuarial science · Basis (linear algebra) · Basis risk · Business · Downside risk · Economics · Indemnity · Index (typography) · Risk analysis (engineering) · Risk management · Agricultural risk and resilience · Computer Science · Finance · Income, Poverty, and Inequality · Insurance and Financial Risk Management · Mathematics

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