2010 Graduate Student News:
Jing Cai Researches
The Effect of Production Insurance on the Rural Financial Market:
Evidence from China

Jing Cai is a PhD candidate in Agriculture and Resource Economics.

Household incomes in developing rural economies are subject to great uncertainty. One way to shield farmers from risks is to provide them with opportunities to purchase formal insurance products. As a result, many developing countries are making efforts to improve the quality and coverage of agricultural insurance products. Although enhancing the rural insurance market is an important policy in many other developing countries, there is little research that examines the effect on rural households when production insurance is made available. It is important to be able to quantify the benefits of production insurance; since the costs of subsidizing insurance are large, the program will only be worthwhile if there are also significant benefits. My research strives to measure the effect of insurance provision on the production, savings, credit demand and credit supply of rural households.
 
For example, in China, in 2007 alone, the central government spent 10 billion RMB ($1.4 billion) on subsidizing insurance adoption. The Chinese government started to provide insurance to tobacco farmers in selected pilots in Jiangxi province in 2003. This intervention provides an opportunity to study our research questions. To fulfill this objective, it is important to collect data ranging from 2000 to 2008.  The data describe households’ backgrounds, tobacco production information, saving habits, borrowing habits, credit supply, insurance provision, et cetera.  Funding from IBER allowed me to pay for the datasets that are so important to my research.

With the data, I am able to analyze the impact of insurance provision on rural households. The estimation result is as follows: Banks tend to lend more to households who have insurance. Additionally, introducing insurance increases tobacco production area by 2.45 mu (about 4.2 acres), which brings an excess income of 3,140 RMB (about $460) while raising the production cost by 850 RMB (about $124). Provision of insurance can decrease household saving by 1,690 RMB (about $247), decrease the saving rate by 9% and raise the loan size by 1,240 RMB (about $182). Further, insurance provision has a larger effect on households with a larger production scale, less migration income and less production diversification.

I hope that my research findings enable policy makers to tailor production insurance programs to fit the needs of a variety of rural households.

 

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