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An experiment on the impact of weather shocks and insurance on risky investment

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  • Hill, Ruth Vargas
  • Viceisza, Angelino

Abstract

We conduct a framed field experiment in rural Ethiopia to test the seminal hypothesis that insurance provision induces farmers to take greater, yet profitable, risks. Farmers participated in a game protocol in which they were asked to make a simple decision: whether to purchase fertilizer, and if so, how many bags. The return to fertilizer was dependent on a stochastic weather draw made in each round of the game protocol. In later rounds of the game protocol, a random selection of farmers made this decision in the presence of a stylized weather-index insurance contract. Insurance was found to have some positive effect on fertilizer purchases. Purchases were also found to depend on the realization of the weather in the previous round. We explore the mechanisms of this relationship and find that it may be the result of both changes in wealth weather brings about and changes in perceptions of the costs and benefits of fertilizer purchases.

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Bibliographic Info

Paper provided by International Food Policy Research Institute (IFPRI) in its series IFPRI discussion papers with number 974.

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Date of creation: 2010
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Handle: RePEc:fpr:ifprid:974

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Keywords: Fertilizer; field experiment; hypothesis; input response; Insurance;

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Citations

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Cited by:
  1. Marenya, Paswel Phiri & Smith, Vincent H. & Nkonya, Ephraim M., 2012. "Subsistence farmer preferences for alternative incentive policies to encourage the adoption of conservation agriculture in Malawi: A choice elicitation approach," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124010, Agricultural and Applied Economics Association.
  2. de Brauw, Alan & Eozenou, Patrick, 2011. "Measuring risk attitudes among Mozambican farmers:," HarvestPlus Working Papers 6, International Food Policy Research Institute (IFPRI).
  3. Cole, Shawn & Gine, Xavier & Vickery, James, 2013. "How does risk management influence production decisions? evidence from a field experiment," Policy Research Working Paper Series 6546, The World Bank.
  4. Janzen, Sarah A. & Carter, Michael R., 2013. "The Impact of Microinsurance on Consumption Smoothing and Asset Protection: Evidence from a Drought in Kenya," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 151141, Agricultural and Applied Economics Association.
  5. Antoine Leblois & Philippe Quirion, 2013. "Agricultural insurances based on meteorological indices: realizations, methods and research challenges," Post-Print hal-00656778, HAL.
  6. Gine, Xavier & Menand, Lev & Townsend, Robert & Vickery, James, 2010. "Microinsurance : a case study of the Indian rainfall index insurance market," Policy Research Working Paper Series 5459, The World Bank.
  7. 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).

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