Information Frictions and the Market for Climate Adaptation

• In Event: Agricultural Policy, Climate Adaptation and Welfare: International Perspectives

Abstract

Despite high exposure to climate risk and extensive policy efforts to subsidize insurance, demand for weather index insurance among smallholder farmers remains low. This study shows that a key barrier lies in how people interpret and act on contract information—not just in affordability or trust.

I conduct a randomized controlled trial with 504 coffee farmers in Cauca, Colombia, who were asked to make a series of real insurance choices across contracts that varied in payout probability and correlation with income. At baseline, around 72% of participants showed very low responsiveness to contract quality, persistently over-purchasing low quality products and under-purchasing high quality products.

To address this, I test two interventions. A rainfall literacy treatment that provided simple summaries of local rainfall probabilities significantly improved contract discernment: responsiveness increased by over 50% relative to baseline. In contrast, a prior beliefs campaign that aimed at shifting perceptions of insurance and climate risk reduced overall demand without improving decision quality, likely a response to insurer's low reputation in the local context. These findings highlight the risks of interventions that raise awareness but not understanding.

The results suggest a form of market failure similar to the classic “lemons” problem: when buyers struggle to evaluate quality, sellers may respond by offering lower-quality products, reinforcing low trust and unraveling the market. Interventions that increase sensitivity to product quality, rather than just shifting priors or boosting demand, may be more effective at sustaining functioning weather insurance markets.

This research underscores the importance of addressing cognitive frictions directly in the design of climate adaptation tools—particularly as climate risks grow and financial products play a larger role in resilience strategies.

Author

• Ricardo Pommer Muñoz, Columbia University
  Presenting Author