Mark Rosenzweig and Chris Udry have an interesting new NBER working paper called “Forecasting Profitability.” As a side note, the title really needs work though in terms of catchiness–the current one sure doesn’t hook potential readers. If it wasn’t for Marc Bellemare, I would have passed the paper right up.
So..what makes this paper interesting is it studies whether rainfall forecasting ability affects Indian farmers decision to invest. According to their calculations, uncertainty causes “Indian farmers to under-invest by a factor of 3 compared to optimal investment levels.” Some of this uncertainty is reduced when the farmers can rely on good weather forecasters. Now forecasting is not equally precise in all parts of the country and farmers know this. When forecasters are good, farmers pay more attention and are more likely to respond by increasing investment.