Please use this form to submit your study for inclusion into our database. It will be checked by a member of the Innovation Growth Lab team, who may be in contact to ask for more information. Your email address * Your name * Title * The name of the study Short summary In the context of farming in Malawi, reducing risk did not induce an increase in demand for credit, contrary to theoretical predictions. These results highlight the difficulties in mitigating environmental risks to poor farmers and to increase investments in better technologies. A brief description of the project's goals and its current state Abstract <p>Does production risk suppress the demand for credit? We implemented a randomized field experiment to ask whether provision of insurance against a major source of production risk induces farmers to take out loans to adopt a new crop technology. 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 groundnut seeds for planting in the November 2006 crop season. The other half of 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% for farmers who were offered the uninsured loan. There is suggestive evidence that reduced take-up of the insured loan was due to farmers already having some limited liability in case of default: insured loan take-up was positively correlated with farmer education, income, and wealth, which may proxy for the individual’s default costs. By contrast, take-up of the uninsured loan was uncorrelated with these farmer characteristics.</p> The full abstract of the study, if available Links http://www.sciencedirect.com/science/article/B6VBV-4THC1H8-1/2/1ec0d4775763136eecd38d582b24638b Links to any published papers and related discussions Authors * Affiliations Academic and other institutes that the authors of the study are members of Delivery partner Organisations involved in delivering the trial, if appropriate Year Year Year199419951996199719981999200020012002200320042005200620072008200920102011201220132014201520162017201820192020202120222023202420252026 Month MonthJanFebMarAprMayJunJulAugSepOctNovDec Day Day12345678910111213141516171819202122232425262728293031 Journal Journal publishing the study, if available Publication stage * Working Paper Published Ongoing Research Forthcoming Discussion Paper Research theme * Entrepreneurship Innovation Business Growth Country Country or countries where this study took place. Topics What sort of topics does the study cover? Sample attributes Hypotheses / research question This paper focuses on credit market imperfections that arise due to the absence of or limitations in insurance markets. In these scenarios, borrowers may be deterred from taking on loans by the risk of high default costs when the state of the world is such that income is low. This experiment aims to determine whether bundling insurance with a loan increases demand for the loan. If borrowers are risk averse while the lender is not, a standard debt contract (credit only) will not be optimal because it requires that the borrower bear all of the risk when he or she is least prepared to bear it. In this situation, the provision of insurance should in principle raise adoption among risk-averse farmers. Sample Trial population and sample selection The farmers in the study were current National Smallholder Farmers Association of Malawi (NASFAM) members. The microfinance institutions offered the loans for the hybrid seeds as group liability contracts for clubs of 10-20 farmers, but take-up was an individual decision. The study sample consists of 159 clubs from four different regions of central Malawi (Lilongwe North, Mchinji, Kasungu, Nkhotakota). In these clubs there were 787 farmers who agreed to be part of the study. The treatments were randomised at the level of 32 localities. Each locality had roughly 5 clubs from neighbouring villages. Localities were randomised into two equal sized groups: 16 "uninsured" (control) localities and 16 insured (treatment) localities. Number of treatment groups Size of treatment groups 393 Size of control group Unit of analysis Clustered? Yes No Cluster details Trial attributes Treatment description Treatmented localities were offered a insured loan. The rainfall insurance contract (a rainfall insurance policy with an approximately actuarially-fair premium) was customised to each project region; it divides the cropping season into three phases (sowing, podding/flowering and harvest) and pays out if rainfall levels fall below a particular threshold during each phase. Farmers allocated to treatment were required to take the insurance if they wanted the loan package. Rounds of data collection Baseline data collection and method Survey; questions to participants about what factors they think most affect groundnut production, demographic information (gender, age, land owned, house quality, net income, years of schooling, self-reported risk aversion) Data collection method and data collected Evaluation Outcome variables <p>Take-up of insured and uninsured loans.</p> Results <p>Take-up of insured and uninsured loans: Take-up was 33% for farmers who were offered the uninsured loan, and was 13 percentage points lower among farmers offered mandatory insurance with the loan. The results contradict standard models of risk aversion in borrowing. A potential explanation is that farmers already are implicitly insured by the limited liability (all loans were joint liability) inherent in the loan contract, so that bundling a loan with formal insurance (for which an insurance premium is charged) is effectively an increase in the interest rate on the loan. Among farmers offered the insured loan, take-up is positively associated with a farmer's education, income and wealth. These variables may be correlated with the benefit a farmer can expect from insurance. For farmers offered the uninsured loan, these variables are not associated with take-up.</p> Intervention costs Not available. Cost benefit ratio Reference Gin, X., & Yang, D. 2009. 'Insurance, Credit, and Technology Adoption: Field Experimental Evidence from Malawi'. Journal of Development Economics, Elsevier, May 1, vol. 89(1), pages 1-11. Citation for use in academic references
