| Productivity shocks due to droughts and floods are a major source of risk for rural households in underdeveloped countries. Existing informal insurance mechanisms do not protect against aggregate shocks, which are correlated across households in an area. The essays in this dissertation evaluate innovative ways to manage risk and vulnerability both via private market mechanisms as well as public policies. In the first essay, we discover unintended risk management benefits of India's National Rural Employee Guarantee Act (NREGA), which generates employment to create local infrastructure. Using an empirical strategy that isolates exogenous changes in productivity stemming from rainfall shocks, we find that NREGA reduces the sensitivity of the wage to productivity shocks by 10% - 30%. We also find evidence that the program has effects on ex-ante production decisions, enabling farmers to increase the share of land cultivated with high-risk but higher-return cash crops by 4% - 9%. These results suggest that voluntary workfare programs can enhance social insurance by facilitating ex-post risk management as well as by deterring costly ex-ante income smoothing. Essay two presents results from an ongoing study of the effect of formal rainfall insurance on farmer investment behavior. Exploiting variation from a randomized field experiment, which offered subsidized insurance policies to farmers, we analyze whether farmers covered by rainfall insurance modestly increased investments in cash crops. We find that insured farmers earned more from policy payouts than they spent on insurance premia, but they also experienced reduced agricultural revenue. We discuss potential explanations for our results and note areas for further research. In essay three, we conduct a laboratory experiment to test for selective attention and fear avoidance in the context marketing rainfall insurance. We randomly vary marketing messages via flyers and videos and find that subjects pay more attention to positive frames, but videos overcome some of the aversion to attend to negative frames, perhaps because they are more entertaining than flyers. This seems especially important in the insurance context, because we know that reference points can be manipulated, and prospect theory implies a large potential impact of reference point manipulation on insurance demand. |
