Agricultural Decisions after Relaxing Credit and Risk Constraints

Christopher Udry, Dean Karlan, Robert Osei () and Isaac Osei-Akoto

No 9173, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: agriculture; Insurance markets; Credit markets; Risk; Underinvestment; Misallocation (search for similar items in EconPapers)
JEL-codes: C93 D24 D92 G22 O12 O13 O16 Q12 Q14 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-afr, nep-agr, nep-exp and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (59)

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Related works:
Journal Article: Agricultural Decisions after Relaxing Credit and Risk Constraints (2014)
Working Paper: Agricultural Decisions after Relaxing Credit and Risk Constraints (2012)
Working Paper: Agricultural Decisions after Relaxing Credit and Risk Constraints (2012)
Working Paper: Agricultural Decisions after Relaxing Credit and Risk Constraints (2012)
Working Paper: Agricultural Decisions after Relaxing Credit and Risk Constraints (2012)
Working Paper: Agricultural Decisions after Relaxing Credit and Risk Constraints (2012)
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