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Agricultural Decisions after Relaxing Credit and Risk Constraints

65 Pages Posted: 20 Oct 2012  

Dean S. Karlan

Yale University; Innovations for Poverty Action; Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Robert Darko Osei

University of Ghana - Institute of Statistical, Social and Economic Research (ISSER)

Isaac Osei-Akoto

University of Ghana - Institute of Statistical, Social and Economic Research (ISSER)

Christopher R. Udry

Yale University - Economic Growth Center

Multiple version iconThere are 3 versions of this paper

Date Written: October 2012

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 binding 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 with farmer's own receipt of insurance payouts, with the receipt of payouts by others in the farmer's social network, as well as with recent poor rain in their village. Both investment patterns and the demand for index insurance are consistent with the presence of important basis risk associated with the index insurance, with imperfect trust that promised payouts will be delivered, as well as with overweighting recent events.

Suggested Citation

Karlan, Dean S. and Osei, Robert Darko and Osei-Akoto, Isaac and Udry, Christopher R., Agricultural Decisions after Relaxing Credit and Risk Constraints (October 2012). NBER Working Paper No. w18463. Available at SSRN: https://ssrn.com/abstract=2164588

Dean Karlan (Contact Author)

Yale University ( email )

Box 208269
New Haven, CT 06520-8269
United States

Innovations for Poverty Action ( email )

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Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab ( email )

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United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Centre for Economic Policy Research (CEPR) ( email )

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London, EC1V 3PZ
United Kingdom

Robert Darko Osei

University of Ghana - Institute of Statistical, Social and Economic Research (ISSER) ( email )

P.O BOX LG 74
Legon
Ghana

Isaac Osei-Akoto

University of Ghana - Institute of Statistical, Social and Economic Research (ISSER) ( email )

P.O BOX LG 74
Legon
Ghana

Christopher Udry

Yale University - Economic Growth Center ( email )

Box 208269
New Haven, CT 06520-8269
United States

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