In a memo of last June, we discussed the logic of matching technological innovations with financial innovations that insulate farmers from the risks that shadow dryland West African agriculture. One such innovation is index insurance that can potentially:
- Crowd‐in credit by removing the systemic risk that discourages agricultural lending, especially by micro‐finance institutions (Carter 2008);
- Enhance farmer’s willingness to adopt higher yielding technologies that require greater up‐front investment
- Smooth out farmer’s income across good years and bad years so that …
Realization of this potential requires an index that can be:
- Covers sufficient risk [footnote on basis risk as uncovered]
- Can be delivered at low cost to the small farm sector
While there are a number of candidate indexes (area yield indexes; rainfall and other weather indexes), our research over the last few months reveals that insurance indexes based on remotely sensed measures of vegetative growth can meet these two critical requirements. The remainder of this memo summarizes our work to date.