Impact of formal climate risk transfer mechanisms on risk-aversion: Empirical evidence from rural Ethiopia

Survey and experimental data were collected from smallholder farmers that have access to weather index-based crop insurance (WICI) in Ethiopia. We use an endogenous switching probit (ESP) model to address self-selection and simultaneity biases.

Results from the ESP model show that farmers who purchased WICI are less likely to be risk-averse compared with the counterfactual scenario of being non-purchaser farmers. Similarly, non-purchasers would have attained a significant reduction in their risk-aversion if they had taken up the insurance product. We also find that WICI has a positive and statistically significant effect on farmers’ real-life risk-taking behavior as exemplified by mineral fertilizer use.