UC San Diego

This dissertation asks how political economy concerns, namely that politicians face strong incentives to provide citizens with disaster relief, affects the uptake of crop insurance. It shows that pre-existing government incentives to provide citizens with disaster relief impede index insurance market formation. If citizens know that they get free relief from the government when they experience shocks then they have no incentive to purchase an index insurance product. From a social welfare perspective, however, government relief programs are inefficient and expensive compared to index insurance products. The political dynamic necessitates a public insurance system, where the government purchases index insurance on behalf of farmers. Yet, this dissertation also shows that once put in politicians’ hands, politicians will be apt to allocate index insurance according to their own political objectives. Political economy concerns thus very much need to be at the forefront of any discussion about how to scale up index insurance.