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A field experiment on the impact of weather shocks and insurance on risky investment

Published online by Cambridge University Press:  14 March 2025

Ruth Vargas Hill  and
Angelino Viceisza
Ruth Vargas Hill*
Affiliation:
International Food Policy Research Institute (IFPRI), 2033 K Street NW, Room 400, Washington, DC 20006, USA
Angelino Viceisza*
Affiliation:
International Food Policy Research Institute (IFPRI), 2033 K Street NW, Room 400, Washington, DC 20006, USA
*
[email protected]
[email protected]
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Abstract

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We conduct a framed field experiment in rural Ethiopia to test the seminal hypothesis that insurance provision induces farmers to take greater, yet profitable, risks. Farmers participated in a game protocol in which they were asked to make a simple decision: whether or not to purchase fertilizer and if so, how many bags. The return to fertilizer was dependent on a stochastic weather draw made in each round of the game. In later rounds a random selection of farmers made this decision in the presence of a stylized weather-index insurance contract. Insurance was found to have some positive effect on fertilizer purchases. Purchases were also found to depend on the realization of the weather in the previous round. We explore the mechanisms of this relationship and find that it may be the result of both changes in wealth weather brings about, and changes in perceptions of the costs and benefits to fertilizer purchases.

Keywords

Fertilizer purchasesUncertaintyInsuranceInvestment responseField experimentEthiopia

JEL classification

O13: Agriculture • Natural Resources • Energy • Environment • Other Primary Products D13: Household Production and Intrahousehold Allocation C93: Field Experiments D80: General
Type
Original Paper
Information
Experimental Economics , Volume 15 , Issue 2 , June 2012 , pp. 341 - 371
Creative Commons
Creative Common License - CCCreative Common License - BYCreative Common License - NC
This is an open access article distributed under the terms of the Creative Commons Attribution Noncommercial License (https://creativecommons.org/licenses/by-nc/2.0), which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.
Copyright
Copyright © The Author(s) 2011

Footnotes

Electronic supplementary material The online version of this article (doi:https://doi.org/10.1007/s10683-011-9303-7) contains supplementary material, which is available to authorized users.

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