Michael T. Norton

Quantifying spatial basis risk for weather index insurance

Purpose - The purpose of this paper to develop an empirical methodology for managing spatial basis risk in weather index insurance by studying the fundamental causes for differences in weather risk between distributed locations. Design/methodology/approach - The paper systematically compares insurance payouts at nearby locations based on differences in geographical characteristics. The geographic characteristics include distance between stations and differences in altitude, latitude, and longitude. Findings - Geographic differences are poor predictors of payouts. The strongest predictor of payout at a given location is payout at nearby location. However, altitude has a persistent effect on heat risk and distance between stations increases payout discrepancies for precipitation risk. Practical implications - Given that payouts in a given area are highly correlated, it may be possible to insure multiple weather stations in a single contract as a “risk portfolio” for any one location. Originality/value - Spatial basis risk is a fundamental problem of index insurance and yet is still largely unexplored in the literature.

Evidence of Demand for Index Insurance: Experimental Games and Commercial Transactions in Ethiopia

Abstract We present results of experimental games with smallholder farmers in Tigray, Ethiopia, in 2010, in which participants in the games allocated money across risk management options. One of the options was index insurance that was the same as commercial products sold locally. Participants exhibited clear preferences for insurance contracts with higher frequency payouts and for insurance over other risk management options, including high interest savings. The preference for higher frequency payouts is mirrored in commercial sales of the product, with commercial purchasers paying substantially higher premiums than the minimal, low frequency option available. This combined evidence challenges claims that the very poor universally choose minimal index insurance coverage and supports concerns that demand may outpace supply of responsible insurance products.

An Internet-Based Tool for Weather Risk Management

This paper introduces a web-based computer program designed to evaluate weather risk management and weather insurance in the United States. The paper outlines the economics of weather risk in terms of agricultural production and household well-being; defines weather risk in terms of intensity, duration, and frequency; and illustrates the computer program use by comparing heat and precipitation risks at Ardmore, Oklahoma, and Ithaca, New York.

Applying weather index insurance to agricultural pest and disease risks

ABSTRACT In this paper, we explore the application of weather index insurance to plant pest and disease management strategies using two distinct models: (1) insuring crop loss due to disease incidence (“Crop Insurance”) and (2) insuring the use of pesticides (“Pesticide Insurance”). We find that despite the seeming ease of applying weather-based pest incidence models to an insurance product, insuring plant disease incidence models is presently unsuitable for the insurance market for both scientific and behavioral reasons. However, derivative-like applications of weather index insurance to insure pesticide use offer a means to introduce financial leverage into pesticide usage decisions. Risk management with weather index insurance would thus function as a complement to existing risk management strategies using pesticides, and offer a market-based mechanism for pesticide abatement. We conclude that more interdisciplinary collaboration is needed to develop weather index insurance for remuneration of losses due to plant pests and diseases, but weather index insurance offers a potential mechanism to reduce inefficiencies and negative externalities in agricultural markets if pesticide expenditures are insured instead of crop losses.

Willingness to pay for shrimp attributes and evidence of stigma following the Gulf Coast oil spill

ABSTRACT Mandatory labeling requirements in the United States require shrimp products to be labelled with certain credence attributes: production process and country of origin. To determine the effects of these requirements in the wake of the 2010 Gulf Coast oil spill, we estimate willingness to pay (WTP) for various credence characteristics (geographic origin and production process) and physical attributes using a Becker DeGroot Marschak experimental auction. Although the results are obtained from a small convenience sample, and hence cannot be generalized, we find that participants are willing to pay premiums of

Investigating Demand for Weather Index Insurance: Experimental Evidence from Ethiopia

0.90–

Weather Index Insurance and the Pricing of Spatial Basis Risk

1.23 per half-pound for domestic shrimp (regardless of production method) and

Measuring the Impact of Educational Insurance Games on Index Insurance Take-up

0.60–

Estimating the Indirect Economic Costs to Shrimp Consumers from the 2010 Deepwater Horizon Gulf Coast Oil Spill

1.03 per half-pound for wild-caught shrimp. We also find evidence that Gulf Coast shrimp are stigmatized; controlling for other characteristics, participants are willing to pay

Do Experimental Games Increase Take-up Rates for Index Insurance? A Randomized Control Trial Approach

1.03–