Do crop insurance-certified seed bundles crowd-in investments? Experimental evidence from Kenya 2015-2017

Cecchi, Francesco and Marr, Ana (2019). Do crop insurance-certified seed bundles crowd-in investments? Experimental evidence from Kenya 2015-2017. [Data Collection]. Colchester, Essex: UK Data Service. 10.5255/UKDA-SN-853426

Farm households in Africa must cope with bad conditions as to soil quality, weather and infrastructure. The variability of rainfall causes yields to vary strongly from one year to the next. With yields already low (due to poor soil condition) these variations can be life threatening. Meanwhile, inadequate infrastructure makes it difficult to help the households with access to financial services, insurance and inputs that could stabilize their access to resources, and enhance yields.
Solving a single aspect, say bringing inputs to the farm, will not be sufficient as credit is also needed. But credit can only be provided if sufficient likelihood exists that loans will be repaid. Here, insurance can help. If insurance of the loan makes it attractive enough for the lender, a package can be composed of inputs, with credit and insurance, that solves all these problems with one bundle. Yet, the households will remain exposed to some risks as insuring against all is prohibitively expensive. What is the appropriate degree of insurance in such bundles? That is the core question addressed in this research. It aims at supplying inputs to farmers on credit, with insurance, in such a way that a good balance is found between the benefits and risks to the farmers and the profits and risks to the credit provider.
We investigate the possibilities for such a balanced approach in Kenya and Ethiopia in collaboration with a large insurance provider and a farmers organisation. Together with them we collect information on the costs, benefits and risks involved in using the inputs, the alternatives open to them, and the costs and benefits involved in providing credit to finance the purchase of inputs, with and without an insurance against crop failure.
With all this information, we go and talk to the stakeholders concerned to find out how they would respond if more or less insurance would be provided. Will credit suppliers lower their prices, if repayment of loan is more likely because the crop is insured? Will households decide to take higher yielding (but more risky) crops if part of the downside risk is insured? We establish this for the parties concerned in Kenya and Ethiopia, but also in other African countries.
Having established how these stakeholders respond to changes in insurance, we can proceed to derive what the best degree of insurance might be. And this is then finally tested in a field experiment.
With this knowledge we can help other suppliers of insurance and credit, and farm organisations to establish similar packages that are adapted to the local conditions for input supply, and financial services.

Data description (abstract)

We use a randomised experiment in Kenya to show that smallholder farmers respond to receiving a free hybrid crop insurance conditional on purchase of certified seeds, by increasing farming efforts at the extensive margin—farming more land and increasing total investments. Not only are they more likely to adopt certified seeds, but also invest more complementary inputs, especially fertilizer, and in hiring farm-machinery and labour outside the household. These effects are somewhat muted at the intensive margin, but we do not find strong evidence of crowding-out of effort, except for spending more on hired labour and machinery. Finally, for the treatment group we find significantly greater willingness to pay, as well as higher income expectations in bad years—both in absolute terms and relative to average years.

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