Ex-Ante Hedging vs. Ex-Post Payout Anticipation
RCTClinical Trial
It is critical to distinguish whether production shifts under insurance coverage stem from ex-ante risk-hedging during planting or merely ex-post expectation of receiving a cash payout due to observed poor weather.
Picture this
Imagine an athlete training harder because they bought protective gear before the game begins, rather than slacking off because they expect an insurance check if they get injured during the game.
What the evidence says
The probability of planting cash crops increased sharply during the insurance distribution period well before policy end dates, and the magnitude of production response was statistically uncorrelated with actual ex-post realized payouts.
- Who was studied
- N = 1,479 farming households in Andhra Pradesh, India.
- How
- Time-series tracking of planting decisions relative to insurance distribution dates, interacted with actual ex-post realized payouts.
What to do
Distribute insurance contracts prior to initial planting windows so producers can adjust input decisions under active risk hedging rather than post-disaster expectations.
From the source
"This figure illustrates the fact that the effect of the insurance on behavior appears to be ex ante in nature; it occurs well before the end of the insurance coverage period, and many months before the insurance payout itself is received." [3]
How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment