A Discrete Choice Analysis Of Smallholder Farmers' Preferences And Willingness To Pay For Weather Derivatives: Evidence From Ethiopia

The ability of Ethiopian farmers to deal with rainfall risk is scanty due to the extension of land plots and incomplete and inefficient financial markets. Traditional drought insurance is flawed by information asymmetries, high administrative costs, and non-diversifiable risks. Insurance based on in...

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Bibliographic Details
Published in:Journal of applied business research 2014, Vol.30 (6), p.1671-1692
Main Authors: Castellani, Davide, Viganò, Laura, Tamre, Belaynesh
Format: Article
Language:English
Subjects:
Agricultural cooperatives
Costs
Credit market
Customers
Decision analysis
Drought
Farmers
Financial control
Households
Insurance
Microfinance
Moral hazard
Property & casualty insurance
Rain
Rational choice
Risk exposure
Risk management
Rural areas
Small & medium sized enterprises-SME
Studies
Willingness to pay
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Summary:The ability of Ethiopian farmers to deal with rainfall risk is scanty due to the extension of land plots and incomplete and inefficient financial markets. Traditional drought insurance is flawed by information asymmetries, high administrative costs, and non-diversifiable risks. Insurance based on indexes is a promising alternative. Working on 120 rural households, we estimate the willingness to pay for a drought weather derivative through a mixed logit model allowing for random preferences. The results suggest that the premium, indemnity, and perceived frequency of drought are important determinants of the take-up. Apparent inconsistencies in behavior can be interpreted as rational choices.
ISSN:0892-7626
2157-8834
DOI:10.19030/jabr.v30i6.8882