Insurance, Credit, and Technology Adoption: Field Experimental Evidence from Malawi

This paper argues that the adoption of new agricultural technologies may be discouraged because of their inherent risk. The paper profiles a study that implemented a randomized field experiment to ask whether the provision of insurance against a major source of production risk induces farmers to take loans to invest in a new crop variety. Study details are as follows:

• The research sample comprised 800 maize and groundnut farmers in Malawi, where the dominant source of production risk is the level of rainfall;
• Half of the farmers were randomly selected and offered credit to purchase high-yielding hybrid maize and improved groundnut seeds for planting;
• The other half were offered a similar credit package, but were also required to purchase a weather insurance policy that partially or fully forgave the loan in the event of poor rainfall.

The study found lower take-up among farmers offered insurance with the loan, and higher take-up from farmers who were offered the uninsured loan.It concludes 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.