Our Research Designing purely weather-contingent crop insurance with personalized coverage to improve farmers’ investments in their crops for higher yields

Principal Investigator

Robert M. Townsend

  • Elizabeth and James Killian Professor of Economics
  • Department of Economics

Robert M. Townsend, the Elizabeth and James Killian Professor of Economics at MIT, is a theorist, macroeconomist, and development economist who analyzes the role and impact of economic organization and financial systems through applied general equilibrium models, contract theory and the use of micro data. His books include Financial Structure and Economic Organization (1990), Households as Corporate Firms (2010), Financial Systems in Developing Economies (2011). His honors include: Elected Member of the National Academy of Sciences, twice the recipient of the Frisch Medal (1998, 2012) and the Jean-Jacques Laffont Prize (2011).

Challenge:

How can we improve crop yields and shield farmers’ investments in their cultivation technologies from unfavorable weather and climate change?

Research Strategy

  • Identify and estimate the highly interactive and sequential relationship between the effects of weather and farmer’s actions on crop’s development
  • Understand and quantify how a farmer chooses between competing cultivation practices in response to realized weather, different cultivation conditions, and resulting differences in crop’s health
  • Generate an algorithm that, for a given weather history, outputs a set of various cultivation choices that are optimal for farmers with different cultivation conditions
  • Design insurance products with payoff based only on realized weather, yet offering a multitude of pricing schedules that reflect variations in cultivation choices optimal for different farmers

Project description

Crops the world over are at risk from unfavorable weather, which will further exacerbate with climate change. Farmers in developing countries have no access to insurance against weather shocks that is both affordable and provides accurate compensation of the losses. As a result, farmers continuously underinvest in their cultivation, opting for low-cost, low-yield technologies, and so produce substantially below their potential yield.

Lack of adequate insurance is due to the prohibitive cost of customized products, which require individual verification of each claim. Products that are only weather-contingent do not require individual verification and are thus financially feasible. However, existing weather-contingent designs have a one-to-one mapping of a given weather history to yields. This one-size-fits-all structure overcompensates some farmers and undercompensates others.

We use a multidisciplinary approach to model and quantify the intricate sequential interplay of the effects of weather and farmer’s actions on crop’s continuous development and yield. This enables us to construct a one-to-many mapping of a given weather history to yields, incorporating variations due to differences in cultivation conditions, consequent variation in farmer’s cultivation choices, and the resulting accumulating changes in crop’s development. This in turn lets us design accurate yet solely weather-contingent insurance products that reduce financial risks to farmers from adverse weather and climate change and promote investment in high-yield technologies.

In this project, we use data on rice farmers in Thailand. Our methods can be adapted to other crops and locations.

Additional Details

Impact Areas

  • Food
  • Climate & Sustainability

Research Themes

  • Soil Fertility & Crop Productivity

Year Funded

  • 2019

Grant Type

  • Seed Grant

Status

  • Ongoing