Weather risk is a major source of income fluctuations for rural households in developing countries. Rosenzweig and Binswanger (1993), for example, find that the delay of the monsoon in semi-arid India can have considerable negative effects on agricultural yield and profits. If the monsoon were to arrive one standard deviation late, the poorest quartile of the households in their data would experience a reduction of 35 percent in agricultural profits, while for the median household, the drop would be of 15 percent.
With complete and frictionless financial markets, households would be able to protect consumption from weather shocks fairly well. But because formal insurance markets in developing countries are typically missing, households have to rely on the ex-ante and ex-post risk coping strategies that typically trade expected profits for lower risk (Walker and Ryan, 1990).
One such strategy, particularly if agricultural production is rainfed, is to choose an optimal sowing window (Fein and Stephens, 1987; Rao et al., 2000 and Gadgil et al., 2002). Farmers in semi-arid India, where the main growing season runs from June to November (coinciding with the monsoon), wait for the onset of the monsoon to start planting. If planting occurs when the first rains come, but these rains are scattered and fall several days apart, the seeds may not germinate. In order to salvage the production, farmers are forced to replant, although they may decide to abandon the crop altogether. Either strategy results in significant losses. But being too conservative by postponing planting until one is certain that the monsoon has arrived is also costly, because yield will typically be lower (Fafchamps, 1993; Rao et al., 2000 and Singh et al., 1994). In short, when the first rains of the season come, farmers must assess whether they are just early pre-monsoon rains, in which case they should postpone planting, or whether the rains signal the onset of the monsoon, in which case they should plant immediately.
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Rational Expectations? Evidence from Planting Decisions in Semi-Arid India
