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2014-02-17 | project

Exploring the role of index insurance on farmers’ adaptation to climate change strategies: a field experiment with Costa Rican coffee farmers

Understanding farmers’ responses to climate change is fundamental for the design of adaptation strategies in developing countries. Yet in a climate change scenario in which more frequent and aggressive extreme events are predicted, the risk of suffering losses from climate change is correlated across individuals in a given landscape, in which case the strategies for adaptation can take a collective action dimension. Incentives to take private preventive measures could be a function of government or community actions to prevent or cope with climate change impacts.

Traditional insurance instruments can be used to manage risks. Though, traditional insurance is basically nonexistent in rural areas of developing countries. We are interested on exploring the index insurance as a formal risk sharing arrangement to better manage climate risk. However, the risk-reducing potential of index insurance contracts depends strongly on the extent to which individual farmers are affected by systemic or idiosyncratic risks. Hence, it is interesting to explore whether insurance schemes potentially crowd-out private adaptation.

Our objective is to explore the role of area yield index insurance compare to traditional insurance on farmers’ strategies to adapt to climate change under systemic risk. To do this, we will design an experiment and implement it in the field with real subjects, coffee farmers in Costa Rica, where plantations have been affected by the leaf rusk fungus, due to climate conditions and with serious consequences for harvests in the years come.

This study will be an input into the design of local and national policies to mitigate the adverse effects of climate change in Costa Rica and Central America, and as such will also include a strong dissemination effort in partnership with local institutions. Our study will contribute to the academic literature on index insurance, systemic risk and technology adoption.