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Exposure to drought among rural households in India and other countries should, at least in principle, be largely diversifiable. This is because rainfall is exogenous to the household and not likely to be strongly correlated with the systematic risk factors, such as aggregate stock returns, that are relevant for a well-diversified representative investor. With this principle in mind, the goal of rainfall index insurance is to allow households, groups, and governments to reduce their exposure to weather risk by purchasing a contract that pays an indemnity during periods of deficient (or excessive) rainfall. Advocates argue that index insurance is transparent, inexpensive to administer, enables quick payouts, and minimizes moral hazard and adverse selection problems associated with other riskcoping mechanisms and insurance programs (see World Bank 2005; Barnett and Mahul 2007; Giné, Townsend, and Vickery 2007). This …