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Risk, Insurance and Wages in General Equilibrium

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  • 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.

Suggested Citation

  • Ahmed Mushfiq Mobarak & Mark Rosenzweig, 2014. "Risk, Insurance and Wages in General Equilibrium," NBER Working Papers 19811, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:19811
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    Cited by:

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    2. Daniel LaFave & Duncan Thomas, 2016. "Farms, Families, and Markets: New Evidence on Completeness of Markets in Agricultural Settings," Econometrica, Econometric Society, vol. 84, pages 1917-1960, September.
    3. Emily Breza & Cynthia Kinnan, 2021. "Measuring the Equilibrium Impacts of Credit: Evidence from the Indian Microfinance Crisis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 136(3), pages 1447-1497.
    4. Alain de Janvry & Elisabeth Sadoulet, 2019. "Transforming developing country agriculture: Removing adoption constraints and promoting inclusive value chain development," Working Papers hal-02287668, HAL.
    5. Unal Seven & Semih Tumen, 2020. "Agricultural Credits And Agricultural Productivity: Cross-Country Evidence," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(supp01), pages 161-183, December.
    6. Chaoran Chen & Diego Restuccia & Raul Santaeulalia-Llopis, 2022. "The Effects of Land Markets on Resource Allocation and Agricultural Productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 41-54, July.
    7. Dinkelman, Taryn & Schulhofer-Wohl, Sam, 2015. "Migration, congestion externalities, and the evaluation of spatial investments," Journal of Development Economics, Elsevier, vol. 114(C), pages 189-202.
    8. de Janvry, Alain & Sadoulet, Elisabeth, 2020. "Using agriculture for development: Supply- and demand-side approaches," World Development, Elsevier, vol. 133(C).
    9. Veronika Bertram-Huemmer & Kati Kraehnert, 2018. "Does Index Insurance Help Households Recover from Disaster? Evidence from IBLI Mongolia," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(1), pages 145-171.
    10. John, Felix & Toth, Russell & Frank, Karin & Groeneveld, Jürgen & Müller, Birgit, 2019. "Ecological Vulnerability Through Insurance? Potential Unintended Consequences of Livestock Drought Insurance," Ecological Economics, Elsevier, vol. 157(C), pages 357-368.
    11. Joshua D Merfeld, 2020. "Moving Up or Just Surviving? Nonfarm Self‐Employment in India," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(1), pages 32-53, January.
    12. Kate Ambler & Alan de Brauw & Susan Godlonton, 2018. "Rural Labor Market Responses to Large Lumpy Cash Transfers: Evidence from Malawi," Department of Economics Working Papers 2018-11, Department of Economics, Williams College.
    13. Dong, Jing & Xu, Wanyu & Cha, Jun, 2021. "Rural entrepreneurship and job creation: the hybrid identity of village-cadre-entrepreneurs," China Economic Review, Elsevier, vol. 70(C).
    14. Serfilippi, Elena & Carter, Michael & Guirkinger, Catherine, 2020. "Insurance contracts when individuals “greatly value” certainty: Results from a field experiment in Burkina Faso," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 731-743.
    15. Fink, Günther & Jack, Kelsey & Masiye, Felix, 2014. "Seasonal Credit Constraints and Agricultural Labor Supply: Evidence from Zambia," IZA Discussion Papers 8657, Institute of Labor Economics (IZA).
    16. Alice Bonou & Markus Olapade & Alessandra Garbero & Leonard Wantchekon, 2023. "Evaluation of the Effects of Introducing Risk Management Tools in Agricultural Development: The Case of PADAER Senegal," Agriculture, MDPI, vol. 13(5), pages 1-15, April.
    17. Mark R. Rosenzweig & Christopher Udry, 2014. "Rainfall Forecasts, Weather, and Wages over the Agricultural Production Cycle," American Economic Review, American Economic Association, vol. 104(5), pages 278-283, May.
    18. Wyatt Brooks & Kevin Donovan, 2020. "Eliminating Uncertainty in Market Access: The Impact of New Bridges in Rural Nicaragua," Econometrica, Econometric Society, vol. 88(5), pages 1965-1997, September.
    19. Carter, Michael R. & Cheng, Lan & Sarris, Alexandros, 2016. "Where and how index insurance can boost the adoption of improved agricultural technologies," Journal of Development Economics, Elsevier, vol. 118(C), pages 59-71.
    20. Jonathan Colmer, 2021. "Temperature, Labor Reallocation, and Industrial Production: Evidence from India," American Economic Journal: Applied Economics, American Economic Association, vol. 13(4), pages 101-124, October.
    21. Colmer, Jonathan, 2018. "Weather, labor reallocation and industrial production: evidence from India," LSE Research Online Documents on Economics 88695, London School of Economics and Political Science, LSE Library.

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    More about this item

    JEL classification:

    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

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