Willingness to pay for agricultural risk insurance as a strategy to adapt climate change

Tigist Mekonnen Melesse

#2017-028

Agricultural production is subject to high risk associated with environmental and agro-ecological conditions. Farmers continuously make decisions to mitigate the various adversities. This study evaluates farm households’ willingness to pay for agricultural risk insurance intervention introduced in Ethiopia in 2009. A bidding game approach is used to elicit willingness-to-pay. We use a unique data collected on farmers’ willingness to pay for production risk insurance covering 1500 farm households. The result from the first willingness to pay response model shows that on average, farmers are willing to pay a premium of 55 Ethiopian Birr. By increasing the efficiency of our estimation, a double-bounded dichotomous choice model is estimated in the follow-up willingness to pay response question. It indicates that farmers are willing to pay about 67 Ethiopian Birr to insurance coverage. The use of modern agricultural technologies such as high-yielding variety and inorganic fertilizer, low rainfall, large family size, and high rainfall type are potential indicators that determine farmers’ decision to adopt financial insurance. We also found farmer’s demand for insurance increases due to the changing extreme weather events. Therefore, the study provides information to agricultural policy makers and private companies to promote agricultural insurance and set the premium and enrollment unit.

JEL Classification: D22, D81, G22

Keywords: Risk, uncertainty, technologies, insurance, contingent valuation methods, Ethiopia