  We investigate the sources of variability in agricultural production and
their relative importance in the context of weather index insurance for
smallholder farmers in India. Using parcel-level panel data, multilevel
modeling, and Bayesian methods we measure how large a role seasonal variation
in weather plays in explaining yield variance. Seasonal variation in weather
accounts for 19-20 percent of total variance in crop yields. Motivated by this
result, we derive pricing and payout schedules for actuarially fair index
insurance. These calculations shed light on the low uptake rates of index
insurance and provide direction for designing more suitable index insurance.
