Informal Risk Sharing, Index Insurance, and Risk Taking in Developing Countries

Abstract

Preliminary findings are presented from a research project which examined the interactions between informal risk sharing, index insurance and risk-taking. Rainfall insurance contracts were randomly offered to cultivating and landless households in a set of Indian villages where preexisting census data on caste networks allowed the characterization of the nature and extent of informal risk sharing. We study how informal risk sharing mediates the demand for index insurance, whether index insurance or informal indemnification allows farmers to invest in risky technologies, and the general equilibrium effects of offering insurance contracts to cultivators and agricultural laborers.