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Marc F. Bellemare Posts

Published May 20, 2013

Managing Basis Risk with Multiscale Index Insurance

That’s the title of my article with Ghada Elabed, Michael Carter, and Catherine Guirkinger, which was just published online in Agricultural Economics. Here is the abstract:

Agricultural index insurance indemnifies a farmer against losses based on an index that is correlated with, but not identical to, her or his individual outcomes. In practice, the level of correlation may be modest, exposing insured farmers to residual, basis risk. In this article, we study the impact of basis risk on the demand for index insurance under risk and compound risk aversion. We simulate the impact of basis risk on the demand for index insurance by Malian cotton farmers using data from field experiments that reveal the distributions of risk and compound risk aversion. The analysis shows that compound risk aversion depresses demand for a conventional index insurance contract some 13 percentage points below what would be predicted based on risk aversion alone. We then analyze an innovative multiscale index insurance contract that reduces basis risk relative to conventional, single-scale index insurance contract. Simulations indicate that demand for this multiscale contract would be some 40% higher than the demand for an equivalently priced conventional contract in the population of Malian cotton farmers. Finally, we report and discuss the actual uptake of a multiscale contract introduced in Mali.

The article discusses the index insurance contract my coauthors and I have developed for and sold to cotton producer cooperatives in southern Mali. The rest of this post is more technical, as it goes into the details of the two contributions I’ve highlighted above.

Continue readingManaging Basis Risk with Multiscale Index Insurance
Published May 17, 2013

Public Service Announcement

I received an email yesterday which began as follows:

Instead of a private response back, I would prefer to see your answer as a post on your blog where you leave the comments open for people to respond for several years unlike many of your other posts where I noticed that the comments sections section was already closed.  I had just finished reading your post about [the inverse farm size–productivity relationship] and was going to leave a comment asking for you opinion about [spam].
Since the comments section was not open, could you please make a seperate (sic) post to express your opinion about it.  And then let me know when that is up, as I try not to subscribe to too many people’s blogs.

Since I receive several such emails every month — many of which address me by my first name and, oddly enough  ask me to post an “infographic” of some sort — I figured it was time I made a public service announcement:

Continue readingPublic Service Announcement
Published May 17, 2013

Spoken Like a True Development Economist

I remember there was this fascination with the idea of the informal economy about 10 years ago. Stewart Brand was talking about how brilliant it is that people get by in slums on an informal economy. He’s a friend so I don’t want to rag on him too much. But he was talking about how wonderful it is to live in an informal economy and how beautiful trust is and all that.

And you know, that’s all kind of true when you’re young and if you’re not sick, but if you look at the infant mortality rate and the life expectancy and the education of the people who live in those slums, you really see what the benefit of the formal economy is if you’re a person in the West, in the developed world. And then meanwhile this loss, or this shift in the line from what’s formal to what’s informal, doesn’t mean that we’re abandoning what’s formal. I mean, if it was uniform, and we were all entering a socialist utopia or something, that would be one thing, but the formal benefits are accruing at this fantastic rate, at this global record rate to the people who own the biggest computer that’s connecting all the people.

So Kodak had 140,000 really good middle-class employees, and Instagram has 13 employees, period.

That’s computer scientist Jaron Lanier, who coined the term “virtual reality,” explaining his view that the Internet has destroyed the middle class, in an article on Slate.

Though I’m not sure that the argument that “great stagnation” arguments of the type made by Lanier, which posit that technological change brings increased unemployment, hold much water (thousands of years of technological change seem to indicate otherwise), Lanier’s comment about informal economies is spot on.

Development economists and law-and-economics scholars know the serious inefficiencies that go hand-in-hand with informal economies all too well. Here is one of my favorite articles on those so-called flea-market economies, by Fafchamps and Minten. Here is a whole book by Marcel Fafchamps about the difficulties posed by trying to conduct business in an environment characterized by informality.