Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/98204
Authors: 
Karlan, Dean
Osei-Akoto, Isaac
Osei, Robert Darko
Udry, Christopher
Year of Publication: 
2012
Series/Report no.: 
Center Discussion Paper, Economic Growth Center 1019
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.
Subjects: 
agriculture
insurance markets
credit markets
risk
underinvestment
misallocation
JEL: 
C93
D24
D92
G22
O12
O13
O16
Q12
Q14
Document Type: 
Working Paper

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