Ex-Ante Agricultural Income Smoothing
RCTClinical Trial
Uninsured monsoon weather volatility forces risk-averse, credit-constrained smallholders to allocate land toward safer, low-yielding subsistence crops rather than high-return cash crops to prevent starvation in drought years.
Picture this
Think of a traveler packing only dry crackers instead of fresh fruit because crackers never spoil in bad weather, even though fresh fruit tastes much better and delivers higher nutrition during good weather.
What the evidence says
Formal rainfall risk hedging eliminated the need for ex-ante income smoothing, causing a 6 percentage point increase in cash crop planting likelihood (p = 0.041) and a 27% increase in cash crop land area (p < 0.05).
- Who was studied
- N = 1,479 smallholder farming household heads in semi-arid Andhra Pradesh, India.
- How
- Randomized Controlled Trial (RCT) comparing seasonal crop investments of farmers provided with rainfall index insurance against a control group provided with actuarially equivalent cash promises.
What to do
Distribute formal weather hedging instruments prior to monsoon onset to enable smallholders to reallocate land from low-yield subsistence crops to high-return cash crops.
From the source
"Firms or households subject to uninsurable idiosyncratic risk may shift towards lower-risk, lower-return production activities; this response is dubbed 'income smoothing' by Morduch (1995)."
How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment