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, Revised in July 2013
NBER Program(s):Corporate Finance, Labor Studies, Development Economics

The investment decisions of smallā€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.

download in pdf format
   (752 K)

email paper

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.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w18463

Published: Dean Karlan & Robert Osei & Isaac Osei-Akoto & Christopher Udry, 2014. "Agricultural Decisions after Relaxing Credit and Risk Constraints," The Quarterly Journal of Economics, Oxford University Press, vol. 129(2), pages 597-652. citation courtesy of

Users who downloaded this paper also downloaded* these:
Duflo, Kremer, and Robinson w15131 Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya
Beaman, Karlan, Thuysbaert, and Udry w18778 Profitability of Fertilizer: Experimental Evidence from Female Rice Farmers in Mali
Cai, Chen, Fang, and Zhou w15396 Microinsurance, Trust and Economic Development: Evidence from a Randomized Natural Field Experiment
Hanna, Mullainathan, and Schwartzstein w18401 Learning Through Noticing: Theory and Experimental Evidence in Farming
Dupas and Robinson w14693 Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya
NBER Videos

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

Contact Us