Do farmers care about basis risk? Evidence from a field experiment in India

Abstract

Despite the potential of weather index insurance as an innovative climate risk adaptation instrument for farmers in the developing world, there is a major barrier to its widespread uptake, namely “basis risk”. In this paper, we focus on the spatial dimension of basis risk by analysing rainfall patterns over three years at six villages of Vidarbha region in Maharashtra, India where low-cost automated weather stations were installed. In order to test whether basis risk has salience in farmers’ decision making about weather insurance, we present evidence from a field experiment involving 361 farmers in the region where the weather stations were installed. We find that informing farmers about basis risk significantly reduces farmers’ willingness to buy a hypothetical rainfall insurance product. Combining information on basis risk and premium subsidy lowers the negative effect whilst effects of subsidy information are not robust. Our findings suggest the need to address basis risk in weather insurance design as well as climate risk management communication to farmers.