Projects per year
We report on a randomized field experiment designed to relax credit and risk constraints for agricultural activities. We conducted a study in a drought-prone region in northern Ethiopia among poor smallholders who depended on rainfed agriculture and were members of the Productive Safety Net Programme (PSNP). Data were collected from over 1100 farmers in 32 rural villages over two years. We find that unconditional voucher transfers designated for the purchase of agricultural inputs significantly increased usage of seeds and fertilizers (a flypaper effect), raised the amount of farmland used (a complementary effect), and induced substitution of own effort by hiring casual labor (a local spillover effect). Subsidized rainfall insurance with reduced input vouchers produced weak average effects but greatly increased investments for farmers who were relatively more patient. We do not find heterogeneous effects by farmers’ risk attitudes, however, suggesting that the effects of insurance adoption were mainly determined by how farmers in the safety net made tradeoffs inter-temporally. Insurance demand dropped quickly with the reduction in subsidy and did not correlate with time or risk preference. Therefore, to improve cost-effectiveness, insurance programs should include procedures that help identify forward-looking farmers and encourage their adoption. While our results show that initial subsidies increase future insurance demand, the effect was small and thus initial subsidies would not be a cost-effective mechanism for financially sustainable insurance. Other complementary strategies on the design, promotion, and bundling techniques of insurance would be needed.
Bibliographical noteThis project is part of the research agenda of the Knowledge Platform Inclusive Development Policies and funded by the Ministry of Foreign Affairs of the Netherlands through NWO-WOTRO (W 08.390.002). We also acknowledge research funding support from Lingnan University Direct Grant. These funding bodies do not involve in the research or the writing of the project. We declare no competing interest. We thank our fieldwork supervisors and enumerators for spending weeks in the rural part of Northern Ethiopia to collect data and carry out experimental interventions, and all our helpers for cleaning and compiling the data.
- Agricultural input vouchers
- Rainfall index insurance
- Agricultural production
- Randomized controlled trial
- Productive Safety Net Programme
- Rural Ethiopia