# **1.** **<u>Introduction</u>**

Individuals in developing countries are subject to a multitude of hazards: from covariant shocks, such as droughts, to idiosyncratic shocks, such as falling sick. In West Africa, almost every rural household manages farmland and is exposed to the risk of unpredictable rainfall (Karlan et al. 2014). A wealth of empirical evidence has shown that households are unable to fully insure against such shocks (e.g. Townsend 1994) and the inability to protect their consumption and investment choices from these risks has important long-run welfare implications (Dercon 2004, Alderman, Hoddinott and Kinsey 2006). In this environment of uninsured risk, households often eschew investment opportunities with uncertain returns even if on average their returns are high (Morduch 1990, Walker and Ryan 1990, Dercon and Christiaensen 2011).

Improving the ability of rural household to manage these risks has the potential to substantially improve farmers’ welfare. A variety of financial instruments can help for specific needs and it is likely that an efficient risk management strategy will use a combination of financial products to allow households to manage the multiple shocks they experience. For example, weather insurance is an innovative financial product and can help rural households manage the impact of widespread drought, but will not help a farmer manage losses localized to his fields. Improved access to savings accounts could allow households to quickly respond to unexpected illness, but will have little value in helping households manage large or repeated shocks.

A considerable literature has emerged in recent years that examines the demand for and impact of financial instruments that can help households manage risk. Cole et al. (2013), Karlan et al. (2014), Dercon et al. (2014), and Mobarak and Rosenzweig (2013) assess whether weather index insurance can help households manage uninsured drought risk in India and Sub-Saharan Africa. Dupas and Robinson (2013) assess whether easy access to savings accounts can help Ugandan women manage health risk. Thornton et al. (2012), Dercon et al. (2011) and Delavallade (2014) assess demand for and retention of health microinsurance products among the poor. In sum, each instrument has merits, if implemented correctly, in helping the poor manage risk.

In this paper, we contribute to this literature by providing estimates from field experiments in Burkina Faso and Senegal of the impact of weather insurance and three types of savings on a variety of investment and welfare outcomes. By randomizing the provision of four different financial products, we compare the effectiveness of different types of instruments in achieving welfare gains. The specific focus of the paper is on financial products that encourage investments in agriculture. We assess whether weather insurance is more or less effective than emergency savings in allowing individuals to manage risk. Karlan et al. (2014) also compares the effectiveness of insurance versus direct cash payments in increasing agricultural investment. However, in our study we explicitly compare different savings instruments with insurance. This is akin to Dupas and Robinson (2013), who investigate the impact of four types of targeted health savings instruments with various commitment levels, whereas the focus of this paper is savings in the context of agricultural investments and shocks instead of health.

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