| 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. |