Agricultural Decisions after Relaxing Credit and Risk Constraints

This paper presents findings from 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. The paper states that investment decisions of smallscale farmers in developing countries are conditioned by their financial environment. Capital and risk constraints may be key impediments to investment for smallholder farmers in Ghana. Credit market constraints and incomplete insurance can reduce investment in activities with high expected profits. Findings include:

• Demand for index insurance is strong;
• Insurance leads to significantly larger agricultural investment and riskier production choices;
• Uninsured risk is an important constraint to farmer investment;
• Farmers are able to find resources to increase expenditure on their farms, when provided with insurance against the primary catastrophic risk they face;
• Demand for insurance in subsequent years increases with farmer receipt of insurance payouts, and with receipts of payouts by others in the farmer's social network;
• Investment patterns and demand for index insurance are consistent with the presence of basis risk and with imperfect trust that promised payouts will be delivered.