Demand for a labor‐based drought insurance scheme in Ethiopia: a stated choice experiment approach

Abstract

Index-based weather insurance is increasingly used to manage weather-related risks in smallholder agriculture. However, cash-constrained smallholders often lack the resources to pay an insurance premium, which may undermine its wider adoption. This article investigates alternative insurance payment methods that may help to enhance the adoption of index-based weather insurance. We use a choice experiment to elicit smallholders' willingness to pay in cash or labor for index-based weather insurance in four districts in the south-central highlands of Ethiopia. The insurance schemes were created using a fractional factorial design with three factors: work, cash, and payout rate. We analyze the choice data using a random parameter mixed logit model. We find that the average participants need a subsidy to pay cash for insurance because their willingness to pay is less than the expected cost of the insurance. On average, they are willing to pay only 0.81 ETB (Ethiopian currency) to get an expected yearly payout of 1 ETB. However, most are willing to participate in work-for-insurance programs at lower daily wage rates than is common for other work programs in Ethiopia.JEL classifications: G22, O12, Q18

Depressed demand for crop insurance contracts, and a rationale based on third generation Prospect Theory

“…Standard conceptual economic analysis, invoking expected utility or related theories, holds that risk averters who face financial risks and have actuarially fair risk management contracts available to them will seek to fully offset their risk exposure. However, evidence from the United States and elsewhere is strong that growers do not seek to do so (Bulut, 2018;Che, Feng, & Hennessy, 2019;Du, Feng, & Hennessy, 2017;Huo, Colson, Ramirez, & Liu, 2018;Tadesse, Alfnes, Erenstein, & Holden, 2016). Crop insurance is not unique as an instance of user suboptimization, see, for example, Choi, Laibson, and Madrian (2011).…”

What Leads Farmers to Abandon Coffee Production?: An Experimental Study on Crop Choice in Chumphon Province, Thailand

“…First, farmers were asked to suppose that they had a plain land of one plot, which had eight rai, as an average size in the study region, and then to choose one crop among (A) coffee, (B) oil palm, (C) para rubber, and (D) durian, or (E) to keep this land plain. In this scenario, the RPL model was estimated considering their experience with 3) Choice experiment studies which estimate a random parameter logit model or a generalized mixed logit model without individual effects of risk attitudes are also increasingly seen; for example, on adoption of crop practices with legumes in Malawi (Ortega et al, 2016), adoption of drought tolerance maize in Zimbabwe (Kassie et al, 2017), adoption of pigeon peas as a nitrogen-fixing legume in Malawi (Waldman et al, 2017), and choosing index-insurance in Ethiopia (Tadesse et al, 2017). 4) See Train (2009) for a detailed discussion of the RPL model.…”

Measuring farmers’ preferences for weather index insurance in the Ayeyarwady Delta, Myanmar: a discrete choice experiment approach

“…Therefore, the DCE approach is suitable for our research. In fact, DCEs and CVs have been used to measure farmers' preferences or demands for WII in developing countries, including Bangladesh (Akter et al 2016), Ethiopia (McIntosh et al 2013Castellani et al 2014;Tadesse et al 2017), Ghana (Adjabui et al 2019), India (Ward and Makhija 2018), and Kenya (Sibiko et al 2018). 2 Previous studies have focused on a drought-based WII system for rice production in an area of India (Ward and Makhija 2018) and an inundation-and (hail or wind) storm-based WII system for maize production in a coastal area of Bangladesh (Akter et al 2016(Akter et al , 2017; however, farmers' preferences for these WII systems may not be suitable for the Ayeyarwady Delta area of Myanmar, where natural disasters such as saltwater and cyclone have affected farming.…”