Impact of formal climate risk transfer mechanisms on risk-aversion: Empirical evidence from rural Ethiopia

Kaleab Haile, Eleonora Nillesen and Nyasha Tirivayi

World Development, 2020, vol. 130, issue C

Abstract: This study examines the effect of smallholder farmers’ access to a formal climate risk transfer mechanism on their risk preferences. Survey and experimental data were collected from smallholder farmers that have access to weather index-based crop insurance (WICI) in Ethiopia. We use an endogenous switching probit (ESP) model to address self-selection and simultaneity biases. Results from the ESP model show that farmers who purchased WICI are less likely to be risk-averse compared with the counterfactual scenario of being non-purchaser farmers. Similarly, non-purchasers would have attained a significant reduction in their risk-aversion if they had taken up the insurance product. We also find that WICI has a positive and statistically significant effect on farmers’ real-life risk-taking behavior as exemplified by mineral fertilizer use. The implication of our findings is that formal climate risk transfer mechanisms can positively influence rural household farm investment decisions, by reducing individual risk-aversion. Therefore, they can possibly contribute to poverty alleviation and economic development within agrarian economies that are exposed to recurrent and severe climate shocks.

Keywords: Weather index-based crop insurance; Endogenous risk preferences; Experimental risk elicitation; Endogenous switching probit; Sub-Saharan Africa; Ethiopia (search for similar items in EconPapers)
JEL-codes: C91 D03 I38 N27 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Working Paper: Impact of Formal Climate Risk Transfer Mechanisms on Risk-Aversion: Empirical Evidence from Rural Ethiopia (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:wdevel:v:130:y:2020:i:c:s0305750x20300565

DOI: 10.1016/j.worlddev.2020.104930

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