Risk, crop yields, and weather index insurance in village India

Abstract

We investigate the sources of variability in crop yields and their relative importance in the context of weather index insurance for smallholder farmers in India. Using parcel‐level panel data, multilevel modeling, and Bayesian methods we measure how large a role seasonal variation in weather plays in explaining yield variance. Seasonal variation in weather accounts for 14%–22% of total variance in crop yields, a value that has rarely been convincingly estimated in the economics literature. These calculations shed light on the relatively low rates of uptake of index insurance by resource‐constrained farmers. The results also provide direction for designing more suitable index insurance products.