Can Revenue Index Insurance Outperform Yield Index Insurance?

Index insurance programs in developing countries have focused almost entirely on agricultural production risk (yield), while largely avoiding output marketing risk (price). This omission may miss an important constraint on smallholder investment and may partially explain underwhelming demand for yield-based insurance policies. Here, we explore the viability of an area-revenue index insurance policy and how its performance may compare to that of an area-yield index insurance policy. Using data from Ghana, we conduct reduced-form regression analysis and calibrate a simulation model, finding several important results. We show that there is a negative correlation between farm investment and both yield and price risk. Moreover, our simulation predicts that in most market contexts, revenue insurance suffers from less basis risk, experiences higher demand, and is more effective at crowding-in advanced input adoption as compared to yield insurance. Our results suggest that revenue insurance may be a valuable and impactful product in Ghana