Undergraduate Honors Theses

Thesis Defended

Spring 2011

Document Type

Thesis

Department

Economics

First Advisor

Carlos Martins-Filho

Abstract

Weather-index insurance functions like a weather derivative; it pays out when a weather variable such as rainfall is observed below a predetermined threshold level during a specific time period. Implementing weather-index insurance in developing countries can bring about significant positive welfare effects on individual farmers, their communities, local businesses, and governments. While the low demand for these insurance products has led many papers to discuss possible reasons that farmers do not purchase weather-index insurance despite expected welfare gains, estimation related to contract design has not yet been examined as a cause for low demand. This paper analyzes the effects of different estimation methods for the density functions of relevant weather variables on weather-index insurance contracts. The results show that the choice of estimation technique may have a significant effect on the paramenters of a weather-index insurance contract.

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