Demand for Complementary Financial and Technological Tools for Managing Drought Risk

Abstract

Innovations that mitigate weather-related production risks can potentially benefit farmers in risk-prone areas. We examine two distinct tools for managing drought risk: (1) weather index insurance and (2) a drought-tolerant (DT) rice variety. Although these tools can independently address drought risk, we demonstrate the additional benefits gained by bundling them into a complementary product. Results suggest that farmers are generally unwilling to adopt the DT variety independent of insurance, largely due to a yield penalty under nondrought conditions. When bundled with insurance, however, farmers’ valuation of the variety increases. Farmers value insurance on its own but even more so when it is bundled with the DT variety. We provide evidence that farmers value the complementarities inherent in a well-calibrated bundle of risk management tools.