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Insurance, credit, and technology adoption: field experimental evidence from Malawi
December 2007
Xavier Giné, Dean Yang
The World Bank

Acknowledgements: FANRPAN acknowledges the World Bank website as the source of this report.


The adoption of new agricultural technologies may be discouraged because of their inherent riskiness. This study implemented a randomized field experiment to ask whether the provision of insurance against a major source of production risk induces farmers to take out loans to invest in a new crop variety. The study sample was composed of roughly 800 maize and groundnut farmers in Malawi, where by far the dominant source of production risk is the level of rainfall. We randomly selected half of the farmers to be offered credit to purchase high-yielding hybrid maize and improved groundnut seeds for planting in the November 2006 crop season. The other half of the farmers were offered a similar credit package but were also required to purchase (at actuarially fair rates) a weather insurance policy that partially or fully forgave the loan in the event of poor rainfall. Surprisingly, take up was lower by 13 percentage points among farmers offered insurance with the loan. Take-up was 33.0 percent for farmers who were offered the uninsured loan. There is suggestive evidence 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.


The adoption of new technology plays a fundamental role in the development process. In the 1950s and 1960s, the so-called Green Revolution transformed agricultural production in developing countries by introducing high-yield crop varieties and other modern cultivation practices. While the modernization of production brought about significant increases in agricultural productivity and growth, the impact of the Green Revolution has been uneven. There is enormous variation, within regions and between regions, in the extent to which households have benefited from the availability of these new technologies.1

Among the often cited reasons why technology has failed to diffuse, aversion to risk, credit constraints and limited access to information are leading candidates (Feder, Just and Zilberman, 1985).2 Undoubtedly, production risk is a major source of income fluctuations for rural households involved in agricultural activities, especially in developing countries. Because high-yield varieties are more profitable but also riskier, households unwilling to bear consumption fluctuations may decide not to adopt. In addition, in policy circles the lack of access to credit has traditionally been considered a major obstacle to technology adoption and development.3

With complete and frictionless financial markets, fluctuations would not be a source of concern as households would be able to protect consumption, and credit would flow to activities with the highest marginal return. But in developing countries, insurance and credit markets are typically incomplete or altogether absent. In this environment, the separation of consumption and production decisions may not obtain (Benjamin, 1992), and thus, the relative importance of credit constraints and risk aversion may be confounded (Chaudhuri and Osborne, 2002).

  1. See Griliches (1957) on adoption of hybrid corn in the United States, Evenson (1974) on diffusion of agricultural technologies internationally, and Goldman (1993) on technology adoption across regions in Kenya.
  2. See Evenson and Westphal (1995), Rogers (1995) and Munshi (forthcoming) for a more recent review. See also the introduction in Conley and Udry (2005) for references, as well as Besley and Case (1994). Recent work on technology adoption and social learning includes Foster and Rosenzweig (1995), Munshi (2004), Conley and Udry (2005), and Duflo, Kremer, and Robinson (2006).
  3. The following quote from 1973 by Robert McNamara when he was the World Bank president exemplifies this view: “The miracle of the Green Revolution may have arrived, but for the most part, the poor farmer has not been able to participate in it. He simply cannot afford to pay for the irrigation, the pesticide, the fertilizer… For the small holder operating with virtually no capital, access to capital is crucial”.

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