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Abstract
Natural disasters can be extremely disruptive to farmers and to others whose
incomes depend on a successful crop. Society can gain from more efficient sharing of
crop and natural disaster risks. However, the costs associated with traditional agricultural
risk programs have historically exceeded the gains from improved risk sharing. This
paper explores government intervention in agricultural risk markets and discusses new
approaches to risk sharing with limited government involvement. In particular, we build
the case for introducing negotiable state-contingent contracts settled on area crop yield
estimates or locally appropriate weather indices. These instruments could replace
traditional crop insurance at a lower cost to government while meeting the risk
management needs of a wider clientele.