Agricultural Decisions after Relaxing Credit and Risk Constraints

Dean Karlan, Robert Darko Osei, Isaac Osei-Akoto, Christopher Udry

NBER Working Paper No. 18463
Issued in October 2012
NBER Program(s):   CF   LS   DEV

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 binding 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 with farmer's own receipt of insurance payouts, with the receipt of payouts by others in the farmer’s social network, as well as with recent poor rain in their village. Both investment patterns and the demand for index insurance are consistent with the presence of important basis risk associated with the index insurance, with imperfect trust that promised payouts will be delivered, as well as with overweighting recent events.

A non-technical summary of this paper is available in the March 2013 NBER digest.  You can sign up to receive the NBER Digest by email.

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


This paper was revised on July 5, 2013


Machine-readable bibliographic record - MARC, RIS, BibTeX

Users who downloaded this paper also downloaded these:
McGarry w18446 Dynamic Aspects of Family Transfers
Beaman, Karlan, Thuysbaert, and Udry w18778 Profitability of Fertilizer: Experimental Evidence from Female Rice Farmers in Mali
Jensen w16021 Economic Opportunities and Gender Differences in Human Capital: Experimental Evidence for India
Graff Zivin, Kotchen, and Mansur w18462 Spatial and Temporal Heterogeneity of Marginal Emissions: Implications for Electric Cars and Other Electricity-Shifting Policies
Karlan, Knight, and Udry w18325 Hoping to Win, Expected to Lose: Theory and Lessons on Micro Enterprise Development

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us