Social Capital,Income Diversification and Climate Change Adaptation: Panel Data Evidence from Rural Ethiopia

The choice between specialisation and diversification of income is driven by multiple, interacting factors, such as economies of scale and scope, risk considerations, context, and household characteristics. Using panel data from Ethiopia, we investigate the role of social capital and the covariate risk of climate change and their interaction. We find that households with greater social capital tend to be more specialised, implying that diversification and informal insurance are substitutes in the mitigation of risk. We also find that this effect is significantly weaker in regions more prone to climate change, which is consistent with the average farmer being aware that informal insurance is not an effective protection against risks that affect the entire social network. We use instrumental variable random effects estimation to account for the plausible endogeneity of social capital and we also establish that our results do not depend on the poorest and most constrained individuals in our sample.     

Warming temperatures will likely induce higher premium rates and government outlays for the U.S. crop insurance program

Likely climate change impacts include damages to agricultural production resulting from increased exposure to extreme heat. Considerable uncertainty remains regarding impacts on crop insurance programs. We utilize a panel of U.S. corn yield data to predict the effect of warming temperatures on the mean and variance of yields, as well as crop insurance premium rates and producer subsidies. While we focus on corn, we demonstrate that the subsidy impacts are likely to carry over to other major program crops. We find that warming decreases mean yields and increases yield risk on average, which results in higher premium rates. Under a 1°C warming scenario, we find that premium rates at the 90% coverage level will increase by 39% on average; however, there is considerable statistical uncertainty around this average as the 95% confidence interval spans from 22% to 61%. We also find evidence of extensive cross‐sectional differences as the county‐level rate impacts range from a 10% reduction to a 63% increase. Results indicate that exposure to extreme heat and changes in the coefficient of variation are large drivers of the impacts. Under the 1°C warming scenario, we find that annual subsidy payments for the crop insurance program could increase by as much as $1.5 billion, representing a 22% increase relative to current levels. This estimate increases to 3.7 billion (57%) under a 2°C warming scenario. Our results correspond to a very specific counterfactual: the marginal effect of warming temperatures under current technology, production, and crop insurance enrollments. These impacts are shown to be smaller than the forecasted impacts under a commonly used end‐of‐century general circulation model for even the most optimistic CO₂ emissions projection.     

Crop insurance policies and purchases in France

While many crop insurance systems have been reformed around the world, few academic researches have addressed the determinants of the decision on crop insurance at the farm's micro level. In this article, both the financial and the agricultural literature lead to the identification of many rationales for the crop insurance decision. Using data from the period 2003–2006 on a representative survey of French farms (FADN‐RICA), we investigate the different factors that incite farmers to insure against crop risk. We emphasize that the highest risk farms are more likely to have insurance and this decision is positively related to the past amount of claims. Insurance is subscribed by larger farms because insurance appears too expensive for smaller farms, which are indeed naturally less diversified. Interestingly, financial variables (such as capital structure or return on investment) do not significantly determine the insurance decision.     

Risks and farmers’ investment in productive assets in Nigeria

The majority of farmers in sub‐Saharan Africa (SSA) lack the means to mitigate the impact of risks associated with rainfall and commodity prices due to capital constraints and the imperfect insurance market in these countries. Because most SSA farmers are risk averse, they may be willing to invest in productive assets that can mitigate the impacts of such risks if their capital constraints are relaxed through external financial assistance. We test this hypothesis by using panel data on investment behavior of Nigerian farmers who received financial assistance on productive assets. The empirical results show that farmers facing higher rainfall risks are more likely to invest in irrigation pumps that can mitigate the impact of rainfall risks, while those facing higher risks of white gari price are more likely to invest in milling machines that enable them to process cassava into flour instead of gari, which supports our hypothesis.     

Cattle sharing and rental contracts in an Agrarian economy: evidence from Ethiopia

Empirical evidence on the role of cattle sharing and rental contracts in agrarian economies is limited. This article is an investigation of different types of cattle sharing and rental contracts producers in rural Ethiopia adopt. It also investigates why households in rural Ethiopia rely on these contracts that are vulnerable and therefore subject to potential moral hazard problems described in earlier literature. We apply random effect probit and control function econometric methods to household panel data collected in 2005 and 2007 from two agro‐ecological zones in Ethiopia. Controlling for the endogeneity of access to livestock credit, we find that contracts are spatially fragmented and better developed where population density is high and credit and insurance markets are poorly developed. We also find that contracts help cash poor and credit constrained households to improve their herd dynamics, to get access to nonlivestock resources (land, labor and cash) and share risks that could have been difficult without the contract. We show that contracts are rational responses of residents in rural communities characterized by imperfect credit and insurance services, since households with better access to credit are less likely to rely on contracts.     

The efficiency of composite weather index insurance in hedging rice yield risk: evidence from China

As an economic and market‐transparent program, weather index insurance is expected to mitigate asymmetric problem. Capturing the relationship between yield and weather factor(s) is the basis of index insurance, but remains a challenge for weather index schemes. Meanwhile, composite weather index insurance is needed by farmers when their agricultural activities involve several risks, but is rarely studied. We aim to design a composite weather index insurance model and evaluate its efficiency in hedging yield risk by using the case of rice production in China. We divide the whole growth cycle of rice into six stages on the basis of agronomic knowledge, and use the average value of each weather factor in each stage to design a weather index. Then, the efficiency of composite weather index insurance is evaluated by mean‐semivariance and value‐at‐risk methods. First, we find that subdivision of the growth cycle helps to better capture the subtle relationship between rice yield and weather factors. Second, composite weather index insurance evidently reduces yield risk. Our findings help further adoption of weather index insurance in agricultural fields.     

The impact of safety nets on technology adoption: a difference‐in‐differences analysis

This article contributes to a growing body of empirical literature relating credit constraints and incomplete insurance to investment decisions. We use panel data from rural Ethiopia to investigate whether participation in a safety net program enhances fertilizer adoption. Using a difference‐in‐differences estimator and inverse propensity score weighting, we find that participation in Ethiopia's food‐for‐work (FFW) program increased fertilizer adoption in the short run, but not in the long run. Results also indicate that the intensity of fertilizer usage increased with livestock holdings for FFW‐participant households, providing some evidence that the intervention helped asset‐rich farm households more than asset‐poor households. We find no significant effects of free distribution on fertilizer adoption or intensification. Our results are consistent with the hypothesis that safety nets can be viewed as mechanisms that allow households to take on more risk to pursue higher profits. The results highlight the importance of safety net programs, their effectiveness in ensuring farmers that they will be protected against uninsured shocks, and how that assurance can translate into productivity‐enhancing behavior.     

More reasons why farmers have so little interest in futures markets

The use by farmers of futures contracts and other hedging instruments has been observed to be low in many situations, and this has sometimes seemed to be considered surprising or even mysterious. We propose that it is, in fact, readily understandable and consistent with rational decision making. Standard models of the decision about optimal hedging show that it is negatively related to basis risk, to quantity risk, and to transaction costs. Farmers who have less uncertainty about prices and those with a diversified portfolio of investments have lower optimal levels of hedging. If a farmer has optimistic price expectations relative to the futures market, the incentive to hedge can be greatly reduced. And finally, farmers who have low levels of risk aversion have little to gain from hedging in terms of risk reduction, in that the certainty‐equivalent payoff at their optimal hedge may be little different than the certainty equivalent under zero hedging. These reasons are additional to the argument of Simmons (2002) who showed that, if capital markets are efficient, farmers can manage their risk exposure through adjusting their leverage, obviating the need for hedging instruments.     

Adoption of weather‐index insurance: learning from willingness to pay among a panel of households in rural Ethiopia

In this article we examine which farmers would be early entrants into weather‐index insurance markets in Ethiopia, were such markets to develop on a large scale. We do this by examining the determinants of willingness to pay for weather insurance among 1,400 Ethiopian households that have been tracked for 15 years as part of the Ethiopian Rural household Survey. This provides both historical and current information with which to assess the determinants of demand. We find that educated, wealthier individuals are more likely to purchase insurance. Risk aversion is associated with low insurance take‐up suggesting that models of technology adoption can inform the purchase and spread of weather index insurance. We also assess how willingness to pay varied as two key characteristics of the contract were varied and found that basis risk reduces demand for insurance particularly when the price of the contract is high, and that provision of insurance through groups is preferred by female headed households and individuals with lower levels of education.     

Developing Hedging Strategies for Québec Hog Producers under Revenue Insurance

The paper investigates the optimal hedging strategies of Québec hog producers when they participate in a publicly funded revenue insurance program known as ASRA (Régime d'assurance-stabilisation des revenus agricoles). A forecast model of local cash and futures prices is built and Monte Carlo methods are used to derive the optimal futures and option positions of Québec hog producers. The positive correlation between forecasts of futures and cash spot prices induces positive sales of futures and put options to hedge price risk. ASRA provides put options to hog producers at actuarially advantageous terms. Producers can increase the expected utility of profits by selling back a portion of these put options using financial markets. Options are attractive to manage price risk given the nonlinearity in the profit function induced by the revenue insurance scheme. Speculative incentives to use futures and options are also discussed in the context of ASRA.     

The influence of direct payments on farmers’ hail insurance decisions

We analyze determinants of hail insurance use of Swiss farmers, using FADN panel data covering the period 1990–2009. Mixed effect logistic regression models are estimated to identify the most important farm and farmer characteristics that trigger insurance use. In addition, information on local hail risk is taken into account in these models. It shows that larger farms, with specialization in crop production, and with larger local hail risks are more likely to adopt the hail insurance. Moreover, insurance users are usually older and better educated. Since the early 1990s, Swiss agricultural policy has reduced price support and introduced general and ecological direct payments. This has led to a much higher importance of direct payments for farmers’ incomes. Our analysis shows that this development has contributed to decreasing hail insurance adoption rates in Switzerland over the period considered. Our results indicate that the larger the share of direct payments for total farm revenue, the less attractive is insurance as a risk management strategy for farmers. This interdependency should be explicitly considered by agricultural policy in the design of support mechanisms.     

Finding optimal price risk management instruments: the case of the Spanish potato sector

This article offers a comprehensive analysis of the problem of choosing between alternative market risk management instruments. We model farmers' behavior to optimize the certainty equivalent, formulated by a mean–variance model, by combining instruments with and without basis risk. Results are expressed as the demands for hedging with futures, forward contracts and insurance. Theoretical results are applied to a selection of Spanish producers of fresh potatoes, a sector that is exposed to significant market risks. Amsterdam's Euronext provides potato futures prices, and the recently launched revenue insurance in Spain provides the example for price insurance. Three conclusions summarize the article's main findings. First, we show that Spanish potato revenue insurance subsidies are a factor that determines the instrument rankings and choice. Second, the efficiency of insurance subsidies is generally low. Finally, the Amsterdam potato futures market does not provide a cost‐effective means to manage price risks for Spanish fresh potato growers.     

Managing increasing environmental risks through agrobiodiversity and agrienvironmental policies

Agrobiodiversity can provide natural insurance to risk‐averse farmers by reducing the variance of crop yield, and to society at large by reducing the uncertainty in the provision of public‐good ecosystem services, for example, CO₂ storage. We analyze the choice of agrobiodiversity by risk‐averse farmers who have access to financial insurance, and study the implications for agrienvironmental policy design when on‐farm agrobiodiversity generates a positive risk externality. While increasing environmental risk leads private farmers to increase their level of on‐farm agrobiodiversity, the level of agrobiodiversity in the laissez‐faire equilibrium remains inefficiently low. We show how either one of the two agrienvironmental policy instruments can cure this risk‐related market failure: an ex ante Pigouvian subsidy on on‐farm agrobiodiversity and an ex post payment‐by‐result for the actual provision of public environmental benefits. In the absence of regulation, welfare may increase rather than decrease with increasing environmental risk, if the agroecosystem is characterized by a high natural insurance function, low costs, and large external benefits of agrobiodiversity.     

森林保险保费补贴政策林业产出激励效应评估

基于开展森林保险保费补贴政策的23个省(市、自治区)2014—2018年面板数据,在分析正向激励效应与负向抑制效应下的森林保险保费补贴政策产出效应传导机制的基础上,运用柯布-道格拉斯生产函数与面板数据模型从林业产出视角分别对全国层面、东部地区和中西部地区的森林保险保费补贴政策实施效果进行评估。结果表明:森林保险保费补贴政策存在产出激励效应,且存在1期滞后;同时,森林保险保费补贴对林业产出的促进效果受影响于林业风险,风险水平的上升会抑制保费补贴政策对林业产出的促进作用;森林保险保费补贴政策产出激励效应及林业风险对补贴政策产出激励效应的影响均存在区域差异性。最后,提出实施保费补贴差异化、逐步提升保障水平等建议。     

Self‐protection from weather risk using improved maize varieties or off‐farm income and the propensity for insurance

We investigate how self‐protection from the adoption of Improved Maize Varieties (IMV) and off‐farm income affects risk premiums for smallholder maize producers in Uganda. To unbundle these effects, we specify the cost of risk to explicitly capture four risk components—mean, variance, skewness, and kurtosis. Using unique plot‐level panel data for Uganda, we estimate and test moments of a flexible production function based on an expanded form of the Johnson S_U family distribution and proceed to simulate the degree of responsiveness of risk premiums and welfare estimates to marginal changes in the share of land under IMV and off‐farm income. Scenarios of joint adoption of IMV accompanied with low and high application of inorganic fertilizer, and the effect of off‐farm income when there is high and low supply of farm labor are examined. Results show that the use of IMV and off‐farm income substantially reduces risk premiums and the individual effect is much higher under low fertilizer application and high supply of farm labor, respectively. Thus implying that self‐protection is likely to reduce the propensity for index insurance especially if its design fails to consider the reduction in downside risk.     

Heterogeneous Demand and Supply for an Insurance‐linked Credit Product in Kenya: A Stated Choice Experiment Approach

We employ a discrete choice experiment to elicit demand and supply side preferences for insurance‐linked credit, a promising market‐based tool for managing agricultural weather risks and providing access to credit for farmers. We estimate preference heterogeneity using primary data from smallholder farmers and managers of lenders/insurers combined with household socio‐economic survey data in Kenya. We analyse the choice data using maximum simulated likelihood and Hierarchical Bayes estimation of a mixed logit model. Although there are some similarities, we find that there is conflicting demand and supply side preferences for credit terms, collateral requirements, and loan use flexibility. We also analyse willingness to buy and willingness to offer for farmers and suppliers, respectively, for the risk premium for different attributes and their levels. Identifying the preferred attributes and levels for both farmers and financial institutions can guide optimal packaging of insurance and credit providing market participation and adoption motivation for insurance‐bundled credit product.     

Can satellite‐based weather index insurance improve the hedging of yield risk of perennial non‐irrigated olive trees in Spain?*

Olive oil yields fluctuate strongly due to their dependence on sufficient precipitation. An interesting option to hedge the yield risk in olive cultivation could be satellite‐based weather index insurance. Therefore, we implement index insurance as a hedging alternative for non‐irrigated olive groves using MODerate‐resolution Imaging Spectroradiometer (MODIS) satellite data. For this purpose, we focus on the Spanish region of Andalusia, given its importance in olive production at the international level. We calculate three satellite indices: the Vegetation Condition Index (VCI), the Temperature Condition Index (TCI) and the Vegetation Health Index (VHI). Meteorological indices related to temperature and precipitation are used as benchmarks. Firstly, we estimate the periods that have the greatest influence on the critical vegetative phase of olives, which extends from March to September. Based on the indices, insurance contracts are designed using a copula approach, which is then employed to evaluate their hedging effectiveness. On average, the hedging effectiveness of VCI‐, VHI‐ and TCI‐based weather index insurance contracts amounts to 38 per cent, 38 per cent and 29 per cent, respectively. Moreover, VCI‐ and VHI‐based weather index insurance contracts outperform traditional weather index insurance contracts based on precipitation (by 29 per cent) and temperature (by 16 per cent) indices.     

Happiness over the financial crisis

This paper adds to the literature on the macroeconomic driving forces of happiness. Using data for 106 countries over the financial crisis (2006–2013), we estimate a dynamic panel data model. We find that there is a strong relation between income and happiness. Further, individuals have a stronger aversion against unemployment than against inflation. We perform various robustness checks including cultural differences and additional driving forces such as gender inequality and macroeconomic policies. Finally, we identify happiness shocks using the performance of ones’ country at the FIFA World Cups. We show that movements in happiness can generate business cycles. Interestingly, happiness shocks increase income on impact but decrease it after 1 year.     

Coping with systemic risk in index‐based crop insurance

The implementation of index‐based crop insurance is often impeded by the existence of systemic risk of insured losses. We assess the effectiveness of two strategies for coping with systemic risk: regional diversification and securitization with catastrophe (CAT) bonds. The analysis is conducted in an equilibrium pricing framework which allows the optimal price of the insurance and the number of traded contracts to be determined. We also explore the role of basis risk and risk aversion of market agents. The model is applied to a hypothetical area yield insurance for rice producers in northeast China. If yields in two regions are positively correlated, we find that enlarging the insured area leads to higher insurance premiums. Unless capital market investors are very risk averse, a CAT bond written on an area yield index outperforms regional diversification in terms of certainty equivalents of both farmers and insurers.     

The Relationship between Animal Welfare and Economic Performance at Farm Level: A Quantitative Study of Danish Pig Producers

We propose a theoretical framework for the relationship between animal welfare and the economic performance of livestock farms. We empirically analyse this relationship based on a unique dataset of randomly sampled Danish pig herds that includes information from unannounced inspections of the compliance with the animal welfare legislation. We find large variations in economic performance and animal welfare. The relationship between these two indicators is rather weak, but tends to be slightly positive. A possible explanation for our results is that management has a major influence on both economic performance and animal welfare so that good farm managers are able to meet all animal welfare regulations, while achieving a high economic performance.