Impact of Formal Climate Risk Transfer Mechanisms on Risk-Aversion: Empirical Evidence from Rural Ethiopia

Kaleab K. Haile*, Eleonora Nillesen*, Nyasha Tirivayi*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

This study examines the effect of smallholder farmers' access to a formal climate risk transfer mechanism on their risk preferences. Survey and experimental data were collected from smallholder farmers that have access to weather index-based crop insurance (WICI) in Ethiopia. We use an endogenous switching probit (ESP) model to address self-selection and simultaneity biases. Results from the ESP model show that farmers who purchased WICI are less likely to be risk-averse compared with the counterfactual scenario of being non-purchaser farmers. Similarly, non-purchasers would have attained a significant reduction in their risk-aversion if they had taken up the insurance product. We also find that WICI has a positive and statistically significant effect on farmers' real-life risk-taking behavior as exemplified by mineral fertilizer use. The implication of our findings is that formal climate risk transfer mechanisms can positively influence rural household farm investment decisions, by reducing individual risk-aversion. Therefore, they can possibly contribute to poverty alleviation and economic development within agrarian economies that are exposed to recurrent and severe climate shocks. (C) 2020 Elsevier Ltd. All rights reserved.

Original languageEnglish
Article number104930
Number of pages12
JournalWorld Development
Volume130
DOIs
Publication statusPublished - Jun 2020

Keywords

  • Weather index-based crop insurance
  • Endogenous risk preferences
  • Experimental risk elicitation
  • Endogenous switching probit
  • Sub-Saharan Africa
  • Ethiopia
  • WEATHER-INDEX INSURANCE
  • MAXIMUM-LIKELIHOOD-ESTIMATION
  • FIELD EXPERIMENT
  • POVERTY TRAPS
  • ENDOGENOUS PREFERENCES
  • TECHNOLOGY ADOPTION
  • RAINFALL INSURANCE
  • DISCRETE OUTCOMES
  • TIME-PREFERENCES
  • BEHAVIOR

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