Paper: Productivity, Credit, Risk, and the Demand for Weather Index Insurance in Smallholder Agriculture in Ethiopia

The paper explores the context and constraints to fertilizer use among smallholders in Ethiopia, and whether these constraints affect the demand for weather index insurance (WII), designed to insure the cost of input use. The issues explored include whether fertilizer use is profitable under current smallholder production conditions, whether risk related factors affect fertilizer use, and what are the overall constraints to fertilizer use. The analysis explores the ex-ante and ex-post demand for WII, and relates both to a variety of economic variables. The results suggest that credit constraints affect the demand for WII. The latter is also affected by cash constraints, risk aversion, hyperbolic discounting, and trust for financial institutions. Interestingly the ex-ante and ex-post demands for index insurance do not appear highly correlated, but actual demand tends to be significantly affected by premium subsidies. This questions the validity of ex-ante analyses of willingness to pay for index insurance.