Risk, Insurance and Wages in General Equilibrium

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 04.11.2014, 12:15 - 13:30


Presentation by 

Mark R. Rosenzweig (Yale University)


We estimate the general-equilibrium labor market effects of a randomized control trial in which a rainfall index insurance product was marketed to both cultivators and agricultural wage laborers in India. Consistent with the theoretical predictions of a general-equilibrium model of wage setting with weather risk, we find that both labor demand and equilibrium wages become more rainfall sensitive when cultivators are offered rainfall insurance, because insurance induces cultivators to switch to riskier, higher-yield production methods. The same insurance contract offered to agricultural laborers smoothes wages across rainfall states by reducing labor supply during droughts (when insurance payouts occur). Policy simulations based on our estimates suggest that selling insurance only to land-owning cultivators (which is the current regulatory practice in India and other developing countries) makes wage laborers worse off in some states of the world due to the increase in wage volatility, relative to a situation where insurance does not exist at all. Marketing insurance to both cultivators and the landless eliminates this adverse effect on the landless, and mildly increases average wages compared to a regime of no insurance.

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