Effects of Index Insurance on Demand and Supply of Credit: Evidence from Ethiopia

21 Pages Posted: 6 Oct 2020 Last revised: 5 Nov 2020

See all articles by Temesgen Belissa

Temesgen Belissa

affiliation not provided to SSRN

Robert Lensink

University of Groningen - Department of Economics, Econometrics and Finance; Wageningen UR - Development Economics Group

Anne Winkel

affiliation not provided to SSRN

Date Written: October 2020

Abstract

Index‐based insurance offers a climate risk management strategy that can benefit the poor. This article focuses on whether adopting index insurance improves access to financial markets and reduces credit rationing, using empirical analyses focused on Ethiopia. With different identification strategies, including a newly developed method that leverages the varying availability of index insurance across areas, the authors control for potential selection biases by forecasting potential insurance adopters; they apply a cross‐sectional double‐difference method. Credit rationing can take the form of either supply‐side quantity rationing, in which case potential borrowers who need credit are involuntarily excluded from the credit market, or demand‐side rationing, such that borrowers self‐select and voluntarily withdraw to avoid transaction costs and threats to their collateral. By differentiating supply‐side and demand‐side forms and employing a direct elicitation method to determine credit rationing status, this study reveals that 38% of sample households are credit constrained. The preferred estimation techniques suggest that index insurance significantly reduces supply‐side rationing.

Keywords: Credit Rationing, Ethiopia, Index Insurance; Smallholders

JEL Classification: D82, G21, G22, O13, O16, O55

Suggested Citation

Belissa, Temesgen and Lensink, Robert and Winkel, Anne, Effects of Index Insurance on Demand and Supply of Credit: Evidence from Ethiopia (October 2020). American Journal of Agricultural Economics, Vol. 102, Issue 5, pp. 1511-1531, 2020, Available at SSRN: https://ssrn.com/abstract=3703734 or http://dx.doi.org/10.1111/ajae.12105

Temesgen Belissa (Contact Author)

affiliation not provided to SSRN

No Address Available

Robert Lensink

University of Groningen - Department of Economics, Econometrics and Finance ( email )

P.O. Box 800
9700 AH Groningen
Netherlands

Wageningen UR - Development Economics Group ( email )

Hollandseweg 1
WAGENINGEN, 6706 KN
Netherlands

Anne Winkel

affiliation not provided to SSRN

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