Risk mitigation strategies in rural areas of developing countries

Low demand for index insurance in several recent pilot programs has created a puzzle for development economists and policy makers concerned with enhancing farmers risk management capacity in low-income economies. Chapter 1 contributes to the resolution of this puzzle by providing empirical evidence on the relative effectiveness of two primary frameworks for modeling decision-making under uncertainty. Specifically, I test whether features of Cumulative Prospect Theory (CPT), or Expected Utility Theory (EUT), better predict farmers' demand for crop insurance. The data come from a series of abstract and framed lotteries played with 480 small-holder cotton farmers in southern Peru. Abstract risk lotteries allow me to measure individual-specific preference parameters, for both theories. I use these parameters to generate predictions of farmers' choices in two framed insurance games in which farmers choose to purchase one of two available insurance contracts or to purchase no insurance. In the first game, farmers' earnings are framed as gross revenues and are always positive, i.e., this game is played over gains. In the second game, earnings are framed as net revenues and may be either positive or negative so that this is a game played over mixed prospects. I test the relative performance of the two theories by comparing the predictions of farmers' choices versus their actual choices in the insurance games. An important finding with respect to marketing of insurance contracts is that framing incomes as net revenues instead of gross revenues increases the CPT predicted demand by 24%. In the actual insurance games however, only 8% more farmers chose insurance in the net revenues frame. I find that neither theory is a particularly strong predictor of insurance choices, although EUT fares better than CPT for better educated farmers.;Poverty alleviation interventions, designed to stir poor farmers in developing countries towards positive wealth dynamics, include providing them with financial tools to plan for future investments and mitigate future shocks. While behavioral economics has stressed the relationship between time and risk when eliciting preferences, studies of the determinants of farmers participation in these interventions focus separately on either one or the other. Chapter 2 shows experimental evidence that the interplay of risk aversion, impatience and present bias can help explain how labeled commitment devices and index insurance products are not always met with the predicted responses. Measures of time and risk preferences were elicited from farmers in Senegal and Burkina Faso, who also received an endowment and were randomly offered one of four financial products. I find that, contrary to usual assumptions, time preferences can dominate insurance decisions, while risk preferences can dominate savings decisions, despite their respective labels. The data shows that if an index insurance carries much perceived basis risk, it can be approached as a risky investment which is more attractive to more risk tolerant and patient farmers. Conversely, savings decisions can be dominated by precautionary motives despite being described as an investment instrument. Another savings account, designed as savings in case of emergency, was instead more attractive to more risk seeking farmers. I provide explanations for these findings, given how the experiments fell in the time and risk context of the crop cycle. These results contribute to the recent development literature recommending careful attention to complex behavioral considerations when designing policy.;Developing country experiences highlight the importance of augmenting the share of manufacturing and other non-farm activities to encourage economic growth. Migration rates in parts of sub-Saharan Africa are too low to support these development strategies. Using a migrant survey, Chapter 3 examines how migrant success is owed to network support in Ethiopia. We find Ethiopian migrants with help in the job search earn at least 70 percent more. Male contacts achieve the highest returns. Women are the largest beneficiaries. Communal job-brokers could enhance rural-urban migration and wages by helping disadvantaged workers branch out of their social circles and their low wage offers.