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Dissertation_Yiting Li 08212017_01.pdf (2.56 MB)

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Mitigation Index Insurance in Developing Countries

Li, Yiting, Li
http://rave.ohiolink.edu/etdc/view?acc_num=osu150328419452699

Abstract Details

2017, Doctor of Philosophy, Ohio State University, Agricultural, Environmental and Developmental Economics.
Conventional agricultural index insurance indemnifies the policyholder based on the observed value of a specified variable, such as rainfall, that is correlated with agricultural production losses. Typically, indemnities are paid to the policyholder after the losses have been realized and verified by the insurer. This dissertation explores alternate timing for index insurance payouts. In particular, I explore the potential benefits of what I call “mitigation index insurance” in which the payouts of the insurance contract arrive before losses are incurred, in time to be used to take measures to mitigate, that is, reduce, eventual losses. First, I systematically compare the costs and benefits of mitigation index insurance with those of conventional index insurance using a stylized three-period, discrete choice, stochastic dynamic optimization model. I assess the relative values of mitigation index insurance and conventional index insurance by deriving the individuals expected ex-ante welfare under three insurance scenarios: a) the individual purchases no insurance; b) the individual purchases conventional index insurance; and c) the individual purchases mitigation index insurance. The analysis indicates that mitigation insurance can reduce moral hazard by providing incentives for the policyholder to undertake loss mitigation measures that are absent with conventional index insurance. I also find that the value of mitigation insurance rises as the precision of signal rises, the cost of mitigation rises, and the individual’s initial wealth falls. Next, I turn to a multi-period dynamic stochastic model with a more refined treatment of time and explore whether it is worthwhile to mitigate and when it is optimal to do so. In general, I find that the benefits of mitigation depend on two dynamically countervailing factors. The closer one is to the realization of the loss event, the more accurately the signal predicts the eventual loss; however, the loss reduction benefit obtained from taking mitigation measures falls, or equivalently the cost of taking mitigation measures rises. Thus, the trade-off is that the longer one waits to mitigate, the better informed one is about its benefits, but the less cost effective it becomes. Information and mitigation costs thus have profound implications for the optimal timing of mitigation insurance indemnities. Last, I focus on the potential benefits of replanting guarantee insurance, a specific example of mitigation index insurance in which farmers are provided with a new bag of seed to replant if their original planting fails to germinate properly. I explore how replanting guaranteed insurance affects farmers’ seed choice and replanting decision using an infinite horizon, stochastic dynamic optimization model. I assess the values of replanting guarantee insurance by deriving the smallholders expected ex-ante welfare under two scenarios: farmers who must undertake decisions without replanting guarantee insurance and farmers who may purchase certified seed coupled with a replanting guarantee insurance. I find that replanting guarantee encourages farmers to purchase hybrid seed if the premium is set at a reasonable level.
Mario Miranda (Advisor)
Abdoul Sam (Committee Member)
Jon Einar Flatnes (Committee Member)
120 p.
Agricultural Economics
mitigation index insurance

Recommended Citations

Citations

  • Li, Li, Y. (2017). Mitigation Index Insurance in Developing Countries [Doctoral dissertation, Ohio State University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=osu150328419452699

    APA Style (7th edition)

  • Li, Li, Yiting. Mitigation Index Insurance in Developing Countries. 2017. Ohio State University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=osu150328419452699.

    MLA Style (8th edition)

  • Li, Li, Yiting. "Mitigation Index Insurance in Developing Countries." Doctoral dissertation, Ohio State University, 2017. http://rave.ohiolink.edu/etdc/view?acc_num=osu150328419452699

    Chicago Manual of Style (17th edition)

osu150328419452699
196
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This open access ETD is published by The Ohio State University and OhioLINK.