Our Research Designing purely weather-contingent crop insurance with personalized coverage to improve farmers’ investments in their crops for higher yields
Transplanting of rice seedlings is highly labor-intensive. Without adequate rain, seedlings do not survive, and all invested labor is wasted. Photo Credit: Townsend Research team
Village field laborers in Northeastern Thailand, getting ready to prepare plots for planting. Photo Credit: Townsend Research team
Cultivation doesn’t end with harvesting: a villager sifting grain. Photo Credit: Townsend Research team
Rice farmers in Northeastern Thailand. For most villagers, rice cultivation is the main, and often only, source of income. Photo Credit: Townsend Research team
Walking tractors, such as this one, are often the only equipment of a farmer growing rainfed rice in Thailand. Photo Credit: Townsend Research team
Transplanting of rice seedlings is highly labor-intensive. Without adequate rain, seedlings do not survive, and all invested labor is wasted. Photo Credit: Townsend Research team
Village field laborers in Northeastern Thailand, getting ready to prepare plots for planting. Photo Credit: Townsend Research team
Cultivation doesn’t end with harvesting: a villager sifting grain. Photo Credit: Townsend Research team
Rice farmers in Northeastern Thailand. For most villagers, rice cultivation is the main, and often only, source of income. Photo Credit: Townsend Research team
Walking tractors, such as this one, are often the only equipment of a farmer growing rainfed rice in Thailand. Photo Credit: Townsend Research team
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.
Outcomes
- Used economic modeling of crop cultivation, survey data analysis, and weather simulation to create a basis for crop insurance design that combines the tailored accuracy of traditional yield insurance with the low provision cost of weather-indexed insurance
- Coverage can be customized to plot-level soil characteristics and timing of operations, thus substantially improving the payoff accuracy, while keeping payoffs contingent only on observed weather
- This kind of improved accuracy that considers weather data should stimulate uptake among farmers and supply through insurance providers, so farmers are better protected from weather-induced financial risks
Additional Details
Impact Areas
- Food
- Climate & Sustainability
Research Themes
- Soil Fertility & Crop Productivity
Year Funded
- 2019
Grant Type
- Seed Grant
Status
- Completed