Ambiguity and technology adoption under index insurance: Experimental evidence

This paper investigates the effect of ambiguity on technology adoption under index insurance. I conduct an artefactual field experiment with Ghanaian cocoa farmers. Experimental subjects had an option to invest in a package of fertilizer bundled with index insurance. The returns depended both on the subjects’ investment choices and on a stochastic weather realization. The key ingredient of the study was whether the exact probability of bad weather was known or not. This probability was ambiguous in the experimental treatments, and the degree of this ambiguity varied across treatments. A large negative effect on fertilizer investments was found in treatments with either small or large ambiguity. The effect of large ambiguity was also found to be significantly stronger, suggesting that technologies with which farmers are relatively more experienced are more likely to be adopted under index insurance schemes. I provide new evidence that ambiguity may be a significant factor limiting the effectiveness of index insurance in promoting agricultural innovation. The overall findings are complementary to related recent randomized controlled trials, since it is effectively impossible to precisely calibrate and vary the level of ambiguity using the latter methodology.