Management Science Research Centre (MSRC) Seminar

Jeanette Song

Fuqua School of Business, Duke University

Index-Based Yield Protection for Smallholder Farmer

Date: Friday, February 2, 2024
Time: 10:00 - 11:00 am
Location: Bronfman Building, Room 301

Please contact gina.ceolin [at] mcgill.ca (subject: MSRC%20Inquiry) (Gina Ceolin) for more details.

Government subsidies are common in the agricultural sector to protect farmers from unexpected losses. Two major forms of agricultural subsidies are price protection, under which farmers are subsidized when the market price is low, and yield protection, under which farmers are subsidized when the crop yield is low. While price protection is popular in both developed and emerging economies, implementing yield protection in emerging economies is challenging due to the high costs of yield assessment for small farms. This research examines the design of a recently emerged index-based yield protection policy, which triggers subsidies when a pre-determined index, such as rainfall, predicts a low yield, thereby avoiding costly yield assessment. Our analysis generates several intriguing findings. First, we show that while an increase in index-based subsidy can increase farmers' expected income, it can also increase income variability due to imperfect yield prediction of the index. Based on this result, we uncover a non-monotonic relationship between the accuracy of the index and the optimal subsidy. Second, although price and yield protection are often viewed as strategic substitutes since both can incentivize more planting, we show that they act as strategic complements when the index accuracy is low. Finally, when the government can exert a costly effort to improve index accuracy, contrary to expectations, we find that a tighter budget can lead to a higher optimal investment in index accuracy. Collectively, these insights contribute to a more nuanced understanding of index-based yield protection policies, aiding in developing effective agricultural subsidies.