This paper examines the effect of farmers’ liability on demand for credit with and without insurance. We test predictions of a theoretical model in a lab in the field experiment with coffee farmers in Costa Rica.
Farmers choose how much to invest in six different settings, described on the one hand by whether the loan is insured or not, and on the other by their liability. Our results show that the uptake of loans bundled with insurance is significantly higher than the uptake of loans without insurance, when farmers are liable for sure, and when there is uncertainty about their liability. In the case of limited liability, the uptake of credit is high irrespective of whether the loans are insured or not. Our results suggest that in order to increase the uptake of insurance as a strategy to increase private investment and reduce the vulnerability of farmers to shocks, it is important that farmers are liable with at least some probability.
