Underwriting area-based yield insurance to crowd-in credit supply and demand

Michael R. Carter, Francisco Galarza, Stephen Boucher

Research output: Contribution to conferencePaperpeer-review

27 Scopus citations


Recent theoretical and empirical evidence suggests that risk (especially covariant risk that is correlated across producers) may discourage both the supply of agricultural credit and the willingness of small holders to utilize available credit and enjoy the higher expected incomes credit could make available to them. One possible resolution to this problem is to remove risk from the system by independently insuring it. However, conventional (all hazard) crop insurance has in almost every instance been rendered financially unsustainable by moral hazard and adverse selection problems. This paper instead analyzes two index-based insurance schemes, one based on a weather index, and a second based on measured average yields. While these index insurance products do not protect the farmer from all risks, our econometric analysis (which is based on data from the north coast of Peru) shows that they could have substantial value to the producer and could also crowd-in credit supply from lenders reluctant to carry too much covariant risk in their loan portfolios. We also show that insurance based on measured yields is markedly superior to a weather index (for both borrowers and lenders). We close by arguing that present and past public good failures justify public intervention in this area, and analyze the feasibility of a public scheme to initially underwrite the costs and uncertainties associated with area-based yield insurance.
Original languageEnglish
Number of pages26
StatePublished - 1 Dec 2007
Externally publishedYes
EventSavings and Development -
Duration: 1 Dec 2007 → …


ConferenceSavings and Development
Period1/12/07 → …


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