Working Paper: NBER ID: w19811
Authors: Ahmed Mushfiq Mobarak; Mark Rosenzweig
Abstract: We estimate the general-equilibrium labor market effects of a large-scale randomized intervention in which we designed and marketed a rainfall index insurance product across three states in India. Marketing agricultural insurance to both cultivators and to agricultural wage laborers allows us to test a general-equilibrium model of wage determination in settings where households supplying labor and households hiring labor face weather risk. Consistent with theoretical predictions, we find that both labor demand and equilibrium wages become more rainfall sensitive when cultivators are offered rainfall insurance, because insurance induces cultivators to switch to riskier, higher-yield production methods. The same insurance contract offered to agricultural laborers smoothes wages across rainfall states by inducing changes in labor supply. Policy simulations based on our estimates suggest that selling insurance only to land-owning cultivators and precluding the landless from the insurance market (which is the current regulatory practice in India and other developing countries), makes wage laborers worse off relative to a situation where insurance does not exist at all.
Keywords: Rainfall insurance; Labor markets; General equilibrium; Wage volatility; Agricultural insurance
JEL Codes: J20; O13; O16; O17; Q12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Insurance offered to agricultural laborers (J43) | Smoother wages across rainfall states (J39) |
| Insurance payouts (G52) | Reduced labor supply from insured laborers (J65) |
| Exclusive marketing of insurance to cultivators (G52) | Increased wage volatility for landless laborers (F66) |
| No insurance availability (G52) | Decline in welfare of landless laborers (F66) |
| Rainfall index insurance offered to cultivators (Q15) | Increased labor demand becomes more sensitive to rainfall variability (J23) |
| Increased rainfall (Q54) | Increased harvest labor demand for insured cultivators (J43) |