Agricultural Decisions after Relaxing Credit and Risk Constraints

45 Pages Posted: 1 Mar 2013

See all articles by Dean S. Karlan

Dean S. Karlan

Yale University; Northwestern University - Kellogg School of Management; Innovations for Poverty Action; Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab (J-PAL); 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 Udry

Northwestern University

Multiple version iconThere are 3 versions of this paper

Date Written: November 16, 2012

Abstract

The investment decisions of small-scale farmers in developing countries are conditioned by the farmers’ 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.

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

JEL Classification: C93, D24, D92, G22, O12, O13, O16, Q12, Q14

Suggested Citation

Karlan, Dean S. and Karlan, Dean S. and Osei, Robert Darko and Osei-Akoto, Isaac and Udry, Christopher, Agricultural Decisions after Relaxing Credit and Risk Constraints (November 16, 2012). Center for Global Development Working Paper No. 310, Available at SSRN: https://ssrn.com/abstract=2226582 or http://dx.doi.org/10.2139/ssrn.2226582

Dean S. Karlan (Contact Author)

Northwestern University - Kellogg School of Management ( email )

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Yale University ( email )

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Innovations for Poverty Action ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR) ( email )

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Robert Darko Osei

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

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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

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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