Updated Aug 24, 2020
With agricultural insurance, farmers will receive payouts if the average yields in their area fall below a critical level. But questions remain about how best to design the contract to reflect the realities on the ground. For example, at what geographic scale should the insurance be defined? Too large an area will not accurately reflect the experience of individual farmers. Too small an area and farmers can cooperate to manipulate outcomes.
To mediate these opposing risks, researchers proposed a dual-trigger contract design in which farmers qualify for a payment when a smaller geographic area has average yields that fall below a critical level, as well as a larger geographic area set at a higher trigger level. This dual trigger offers high value to farmers while assuring insurers that the contract will not be at risk of collusion within the village.