TY  - JOUR
AU  - Rosenzweig, Mark
AU  - Udry, Christopher R
TI  - Forecasting Profitability
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 19334
PY  - 2013
Y2  - August 2013
DO  - 10.3386/w19334
UR  - http://www.nber.org/papers/w19334
L1  - http://www.nber.org/papers/w19334.pdf
N1  - Author contact info:
Mark Rosenzweig
Department of Economics
Yale University
Box 208269
New Haven, CT 06520
Tel: 203/432-3588
E-Mail: mark.rosenzweig@yale.edu

Christopher R. Udry
Northwestern University
Department of Economics
Weinberg College of Arts and Sciences
2211 Campus Drive #3247
Evanston, IL 60208
Tel: 203/432-3637
E-Mail: christopher.udry@northwestern.edu
M2  - featured in NBER digest on 2013-10-16
AB  - We use newly-available Indian panel data to estimate how the returns to planting-stage investments vary by rainfall realizations. We show that the forecasts significantly affect farmer investment decisions and that these responses account for a substantial fraction of the inter-annual variability in planting-stage investments, that the skill of the forecasts varies across areas of India, and that farmers respond more strongly to the forecast where there is more forecast skill and not at all when there is no skill. We show, using an IV strategy in which the Indian government forecast of monsoon rainfall serves as the main instrument, that the return to agricultural investment depends substantially on the conditions under which it is estimated. Using the full rainfall distribution and our profit function estimates, we find that Indian farmers on average under-invest, by a factor of three, when we compare actual levels of investments to the optimal investment level that maximizes expected profits. Farmers who use skilled forecasts have increased average profit levels but also have more variable profits compared with farmers without access to forecasts. Even modest improvements in forecast skill would substantially increase average profits.
ER  -