The Value of Forecasts

Climate change will dramatically alter weather patterns around the world, particularly in developing countries. Farmers in poor countries are currently unable to optimally adapt to the weather. Under climate change, yields are projected to fall substantially, and reducing climate risks in the present day could ensure greater adaptation to future changes. Research has found that farmers suboptimally invest in low-risk technologies, reducing average returns. Insurance could relax this key constraint, enabling farmers to invest in profitable up-front inputs. However, insurance typically has low take-up, even at actuarily fair rates. Researchers propose an alternative solution: long-range weather forecasts. Information about the future state should help farmers make profit-maximizing up-front investment decisions. Providing farmers with forecasts is cheaper than selling actuarily-fair insurance, and the adverse selection and moral hazard issues with insurance do not apply to forecasts. Researchers will run a randomized evaluation with farmers in India, where 50 percent of the population is employed in agriculture, to estimate the welfare impacts of forecasts and benchmark these against insurance.