Risk Preferences and the Impact of Credit and Insurance on Farm Technology Uptake

27 March 2019
Publication Type: Working Paper
JEL Code: C6, C9, D2, D8, D9, O1, Q1

We use a series of credit and insurance simulation games to test the role of access to credit and insurance on magnitude and timing of farm technology uptake with small-scale farmers in South Africa. Using Cumulative Prospect Theory, we assess how insurance impacts technology uptake given risk preferences. Our findings suggest that risk aversion is linked to lower uptake of the insured technology. while loss averse farmers are more likely to adopt technology bundled with insurance. Higher weighting of small probability events leads to later uptake of the uninsured technology option. We further find that wealth is critical in uptake of technology, with cumulative experimental income and real household income stifling investment in insured and uninsured technology options even when real wealth is not at stake. Overall, we find that insurance is not sufficient to counter the behavioural factors linked to asset constraints and risk preferences that suppress modern farm technology uptake.

Series title: Working paper 776
1 March 2019
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