Resource information
The adoption of new agricultural
technologies may be discouraged because of their inherent
riskiness. This study implemented a randomized field
experiment to ask whether the provision of insurance against
a major source of production risk induces farmers to take
out loans to invest in a new crop variety. The study sample
was composed of roughly 800 maize and groundnut farmers in
Malawi, where by far the dominant source of production risk
is the level of rainfall. We randomly selected half of the
farmers to be offered credit to purchase high-yielding
hybrid maize and improved groundnut seeds for planting in
the November 2006 crop season. The other half of the farmers
were offered a similar credit package but were also required
to purchase (at actuarially fair rates) a weather insurance
policy that partially or fully forgave the loan in the event
of poor rainfall. Surprisingly, take up was lower by 13
percentage points among farmers offered insurance with the
loan. Take-up was 33.0 percent for farmers who were offered
the uninsured loan. There is suggestive evidence that the
reduced take-up of the insured loan was due to the high
cognitive cost of evaluating the insurance: insured loan
take-up was positively correlated with farmer education
levels. By contrast, the take-up of the uninsured loan was
uncorrelated with farmer education.
