1 Preliminary Version – Please do not cite or circulate Drought and Retribution: Evidence from a large scale Rainfall-Indexed Insurance Program in Mexico Alan Fuchs and Hendrik Wolff 1 April 2014 Abstract Although weather shocks are a major source of income fluctuation most of the world’s poor lack insurance coverage against them. In addition, the absence of formal insurance contributes to poverty traps as investment decisions are conflicted with risk management ones: risk-averse farmers tend to under-invest and produce lower yielding yet safer crops. In the last few years, weather index insurance has gained increasing attention as an effective tool to provide small-scale farmers coverage against aggregate shocks. However, there is little empirical evidence about its effectiveness. In this paper we study the effect of the recently introduced rainfall-indexed insurance on farmers’ productivity, risk management strategies as well as per capita income and expenditure in Mexico. Our identification strategy takes advantage of the variation across counties and across time in which the insurance was rolled-out. We find that insurance presence in treated counties has significant and positive effects on maize productivity. Similarly, there is a positive association between insurance presence at the county and rural households' per capita expenditure and income, though we find no significant relation between insurance presence and the number of hectares destined for maize production. (JEL Q11, Q14, O13, G22) 1 Fuchs: University of California at Berkeley, 207 Giannini Hall, #3310 University of California Berkeley, CA 94720 (email: alanfuchs@berkeley.edu); Wolff: University of Washington, 349 Savery Hall, Box 353330 Seattle, WA 98195 (email: hgwolff@u.washington.edu). The authors wish to thank the National Science Foundation (NSF) for financial support. Alan Fuchs would also like to thank CONACYT/UC-MEXUS and Ford Foundation through El Colegio de Mexico/PRECESAM for financial support. We are grateful to Alain de Janvry, Elisabeth Sadoulet, Jeffrey Perloff, Steven Raphael, Peter Berck, Sofia Berto Villas-Boas, Lucas Davis and Ricardo Cavazos, and participants at the UC Berkeley Development Workshop and the 2010 PacDev for very useful comments. We are also grateful with Victor Manuel Celaya del Toro at the Mexican Ministry of Agriculture for providing data and insights on the program. All remaining errors are ours.