Weather index insurance, agricultural input use, and crop productivity in Kenya

Abstract

Weather risk is a serious issue in the African small farm sector, which will further aggravate due to climate change. Farmers typically react by using low amounts of agricultural inputs. Low input use can help to minimize financial loss in bad years, but is also associated with low average yield and income. Increasing small farm productivity and income is an important prerequisite for rural poverty reduction and food security. Crop insurance could incentivize farmers to increase their input use, but indemnity-based crop insurance programs are plagued by market failures. This paper contributes to the emerging literature on the role of weather index insurance (WII). While a few studies have used experimental approaches to analyze WII impacts, research with observational data is scant. We use data from a survey of farmers in Kenya, where a commercial WII scheme has been operating for several years. Regression models with instrumental variables are used to analyze WII uptake and effects on input use and crop productivity. Results show that WII uptake contributes to higher use of chemical fertilizer and improved seeds, and thus also to higher yields. We conclude that upscaling WII programs may help to spur agricultural development in the small farm sector.