Department of Agricultural, Food, and Resource Economics Feed the Future Innovation Lab for Food Security Policy

Hambulo Ngoma, Nicole M. Mason-Wardell, Paul C. Samboko, and Peter Hangoma, 2019. Switching Up Climate-Smart Agriculture Adoption: Do 'Green' Subsidies, Insurance, Risk Aversion and Impatience Matter, Feed the Future Innovation Lab for Food Security Policy Research Paper 164.

Abstract

Climate-smart agriculture (CSA) is an important component of policy options designed to sustainably increase agricultural productivity, build resilience to climate risks, and mitigate climate change in Sub-Saharan Africa. However, the uptake of common CSA practices such as conservation agriculture remains low and material constraint explanations (e.g., credit, market, labor, information) for this low uptake remain inadequate and unclear. Could behavioral traits or risk preferences play a role?

We test the hypothesis that innate behavioral traits such as risk and time preferences play a role in CSA adoption and test whether adoption can be nudged using insurance and green subsidies. To do so, we use a series of incentivized field experiments with 323 randomly selected farmers in Zambia. We first conducted two games with each participant to elicit risk and time preference parameters. We then conducted three adoption games. In the first (base) game, participants decided whether to adopt CSA (conservation agriculture in this case) or conventional agriculture under various payoff scenarios. Returns to CSA and conventional agriculture varied depending on seasonal rainfall, and the realized seasonal rainfall was determined through a lottery (with a 25% chance of good rainfall) after participants had selected their preferred farming option (CSA or conventional agriculture).

In the subsequent two games, we changed the payoff structures by augmenting CSA with rainfall insurance and a green subsidy, respectively. The green subsidy is an add-on incentive for farmers that adopt CSA. We compare adoption behavior under the base scenario to the CSA plus insurance scenario and the CSA plus subsidy scenario. We also use the elicited preference parameters from the time and risk preferences games to analyze their role in participants’ adoption decisions.

Overall, we find that the majority of participants in our experiments are risk-averse and impatient, and that a larger proportion of women were more risk-averse and impatient than men. Risk aversion and impatience were negatively correlated with the likelihood of adopting CSA. Time and risk preferences were associated with the likelihood of switching adoption between the base and follow- on (augmented) games. For example, an increase in risk aversion increased the likelihood of switching from conservation agriculture in base games to conservation agriculture with insurance in follow-on games.

Introducing insurance and green subsidies increased the level of adoption by 10 and 8 percentage points and the probability of adoption by approximately 6 – 12 percentage points. Whether these switch-up levels are high enough is an empirical question, but suggest that insurance and green subsidies are unlikely the panacea. Thus, although monetary returns matter in CSA adoption, non- pecuniary factors such as risk and time preferences also matter. These behavioral traits could partly explain the perceived low adoption of CSA practices such as conservation agriculture. Several factors including uninsured basis risk, trust in and how well farmers understand insurance and subsidy incentives, knowledge of the technology, and subjective perceptions of its riskiness influence adoption choices. Access to extension and subjective risk perceptions were stronger determinants of adoption in real life.

Given our findings that more risk-averse individuals are less likely to adopt CSA, a practice that is intended to be risk-reducing, a key policy implication is the need for a retooling of both public and private extension services to better demonstrate and educate farmers on the risk-reducing effects of CSA practices such as conservation agriculture. Moreover, if insurance and subsidies are to be used successfully to nudge adoption, extension will need to educate farmers on the structure of and mechanisms for payouts. This is important to build trust in the incentive systems.