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Agricultural Decisions after Relaxing Credit and Risk Constraints

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  • Karlan, Dean S.
  • Osei, Robert
  • Osei-Akoto, Isaac
  • Udry, Christopher

Abstract

The investment decisions of small-scale farmers in developing countries are conditioned by their financial environment. Binding credit market constraints and incomplete insurance can reduce investment in activities with high expected profits. We conducted several experiments in northern Ghana in which farmers were randomly assigned to receive cash grants, grants of or opportunities to purchase rainfall index insurance, or a combination of the two. Demand for index insurance is strong, and insurance leads to significantly larger agricultural investment and riskier production choices in agriculture. The salient constraint to farmer investment is uninsured risk: when provided with insurance against the primary catastrophic risk they face, farmers are able to find resources to increase expenditure on their farms. Demand for insurance in subsequent years is strongly increasing in a farmer’s own receipt of insurance payouts, and with the receipt of payouts by others in the farmer’s social network. Both investment patterns and the demand for index insurance are consistent with the presence of important basis risk associated with the index insurance, and with imperfect trust that promised payouts will be delivered.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9173.

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Date of creation: Oct 2012
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Handle: RePEc:cpr:ceprdp:9173

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Keywords: agriculture; credit markets; insurance markets; misallocation; risk; underinvestment;

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  1. Cole, Shawn & Gine, Xavier & Tobacman, Jeremy & Topalova, Petia & Townsend, Robert & Vickery, James, 2010. "Barriers to household risk management : evidence from India," Policy Research Working Paper Series 5504, The World Bank.
  2. Hongbin Cai & Yuyu Chen & Hanming Fang & Li-An Zhou, 2009. "Microinsurance, Trust and Economic Development: Evidence from a Randomized Natural Field Experiment," PIER Working Paper Archive 09-034, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  3. Hill, Ruth Vargas & Robles, Miguel, 2011. "Flexible insurance for heterogeneous farmers: Results from a small-scale pilot in Ethiopia," IFPRI discussion papers 1092, International Food Policy Research Institute (IFPRI).
  4. Gine, Xavier & Yang, Dean, 2007. "Insurance, credit, and technology adoption : field experimental evidence from Malawi," Policy Research Working Paper Series 4425, The World Bank.
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