As climate risks continue to rise, smallholder farms are more likely to experience agricultural losses from extreme weather events such as flooding, drought, and heat waves.  These subsistence farmers use most of their crops and livestock to feed their own households and usually have few financial protections against the unforeseen costs of climate events.  A study led by C-PREE researchers suggests that a combination of insurance subsidies and policies that promote “prosocial preferences” - decision-making preferences that account for community well-being -  can facilitate co-existence of formal and informal risk transfer mechanisms.     

Using a modeling framework based on evolutionary game theory, co-lead authors Nicolas Choquette-Levy and Matthias Wildemeersch and their colleagues simulated collective-scale outcomes for smallholder farming communities using economic, risk preference, and drought data from Nepal and Ethiopia. The researchers found that communities minimized economic losses when farmers implemented both formal (e.g. insurance)  and informal (e.g. revenue sharing and informal lending) risk transfer.  The co-existence of multiple risk management strategies effectively shields farmers from extreme outcomes during drought cycles and reduces collective-scale volatility, while also protecting farmers against individual risks, for instance a health shock or an unlucky harvest.  

While this socially optimal outcome was achieved when farmers implement both formal and informal risk transfer, self-interested households are unable to uphold this combination in the face of rising climate risk.  

“Over the past decades, several governments have piloted insurance programs specifically to help subsistence farmers cope with climate-related risks,” explains Choquette-Levy. “While these formal market mechanisms have had some success so far, we were curious about whether they might eventually displace existing informal mechanisms through which farmers already manage risks, such as cooperatives and lending groups. Our research showed that this could become a significant challenge as climate risks get more severe, which will likely drive up insurance premiums. That introduces a temptation for some farmers to abandon insurance and rely on the contributions of insured members of the community, which in turn incentivizes insured farmers to leave their cooperative.” 

However, this vicious cycle can be overcome by prosociality, a set of decision-making preferences where households value the wellbeing of others or work in solidarity with their community to create optimal outcomes.  In communities with high levels of prosociality, households diversify their risk transfer mechanisms by participating in revenue-sharing and purchasing formal insurance.  The authors found that by cultivating prosocial preferences, governments can make existing insurance subsidies more efficient by addressing both financial and social barriers to risk diversification.  

Though it might not be realistic to expect high levels of prosocial behavior from every member of a community, even moderate levels of prosociality can lead to outcomes where both formal and informal risk transfers are employed, when paired with financial subsidies for insurance  In this study, the combination of pairing policies to promote moderate prosocial preferences with insurance subsidies reduced expected farming losses by 26% and saved 5% of community agricultural income through reduced premium subsidies. 

“We know that individuals, being farmers, local community leaders, or policy makers, are not entirely self-interested, but also driven by their prosocial preferences,” says Wildemeersch. “We wanted to study the role of these preferences in shaping risk management decisions in farming communities. It is important to account for more realistic ways of decision-making to explain the emergence of cooperative behavior. Fostering prosociality through behavioral interventions can therefore play a crucial role in strengthening the resilience of farming communities against the challenges posed by climate risks.” 

The paper, “Prosocial preferences improve climate risk management in subsistence farming communities,” was co-authored by Nicolas Choquette-Levy (Dept. of Earth and Environment, Boston University, and School of Public and International Affairs, Princeton University), Matthias Wildemeersch (Environmental Change Institute, University of Oxford), Fernando Santos (Informatics Institute, University of Amsterdam), Simon A. Levin (Dept. of Ecology and Evolutionary Biology, Princeton University), Michael Oppenheimer (School of Public and International Affairs, Princeton University), and Elke Weber (School of Public and International Affairs, Princeton University). The paper appeared in Nature Sustainability on February 14th, 2024.