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Agricultural Decisions after Relaxing Credit and Risk Constraints

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Author Info

  • Dean Karlan

    ()
    (Economic Growth Center, Yale University)

  • Christopher Udry

    ()
    (Economic Growth Center, Yale University)

  • Isaac Osei-Akoto

    ()
    (University of Ghana, Legon)

  • Robert Darko Osei

    ()
    (University of Ghana, Legon)

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 Economic Growth Center, Yale University in its series Working Papers with number 1019.

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Length: 57 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:egc:wpaper:1019

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

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  1. Hongbin Cai & Yuyu Chen & Hanming Fang & Li-An Zhou, 2009. "Microinsurance, Trust and Economic Development: Evidence from a Randomized Natural Field Experiment," NBER Working Papers 15396, National Bureau of Economic Research, Inc.
  2. Robert M. Townsend & Shawn Cole & Jeremy Tobacman & Xavier Gine & James Ian Vickery & Petia Topalova, 2012. "Barriers to Household Risk Management," IMF Working Papers 12/195, International Monetary Fund.
  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. Gin, Xavier & Yang, Dean, 2009. "Insurance, credit, and technology adoption: Field experimental evidencefrom Malawi," Journal of Development Economics, Elsevier, vol. 89(1), pages 1-11, May.
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