Application ofweather index insurance in developing countries The role of government

Should the lack of effective private-sector agricultural insurance markets in developing countries be addressed through government intervention? High transactions costs preclude emergence of many markets, but this does not necessarily justify government intervention. In the case of high-frequency, low-consequence losses, government intervention is likely to distort incentives and create rent-seeking opportunities, possibly to an extent that actually reduces net social welfare. Instead, farmers can employ other risk management mechanisms to cover these losses. In fact, insurance products for high-frequency, low-consequence losses are seldom offered because the transaction costs associated with loss adjustment renders the insurance cost prohibitive for most potential purchasers. Governments may have no inherent advantage over markets in trying to facilitate the provision of individual farm-level yield or revenue insurance products, tte private sector typically does not provide these insurance products in part because of information asymmetries that cause moral hazard and adverse selection problems (Miranda and Glauber 1997); it is difficult to see how a government provider would have any advantage in addressing this problem.

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