Managing Basis Risk with Index Insurance in West Africa

Exposure to risk is one of life’s few certitudes. For people who live in developing countries, where underdevelopment almost always extends to financial markets, and where financial instruments to hedge against risk are fewer and further between than in industrialized countries, risk is even more prevalent. The rise of microfinance over the last 20 years has brought about the development of financial instruments designed to protect the poor against some of the risk they face. We first develop an innovative index insurance contract for West African cotton producers, whose harvests are highly variable. The main feature of this contract is that relative to commonly used index insurance contracts, it considerably reduces the basis risk faced by West African cotton producers. We then describe an ongoing evaluation of the impacts of the double-trigger insurance contract in Mali and Burkina Faso.

The abstract of a new paper by three coauthors — Michael Carter, Catherine Guirkinger, and Ghada Elabed — and me on a research project I have been involved with in West Africa since 2010.

The paper is still in rough draft form, and we would be very interested in reader comments and suggestions, both on the paper itself, but also for the research project it describes.

We started out with wanting to run a randomized controlled trial to evaluate the impacts of crop insurance on the welfare of cotton farmers in Mali. In the process, we also decided to elicit those farmers’ risk and ambiguity preferences so as to answer more fundamental behavioral questions about what drives the uptake of micro-insurance.

We were initially planning on collecting up to three rounds of data in Mali, but because of last spring’s coup d’état in Mali, we’ve had to re-orient our project, and we are now starting work in neighboring Burkina Faso. The silver lining of this forced relocation is that it will increase the external validity of our findings.