Parametric Insurance and Technology Adoption in Developing Countries

Abstract

Technology adoption is crucial for the development of low income countries. This paper investigates how parametric insurance can contribute to improving access to finance, and hence to technology, for smallholder farmers. In a model with moral hazard, we show that bundling parametric insurance with loans may lower collateral requirements, thus promoting the financial inclusion of poor households. The case of agricultural input loans and weather-index insurance is studied in detail and related to bundled finance solutions recently piloted among smallholder farmers in Tanzania.

Keywords: parametric insurance, crop insurance, moral hazard, credit rationing, technology adoption

JEL Classification: G22, O16, 031, Q14