The Influence of the Strength of Financial Institutions and the Investment-Production Delay on Commodity Price Cycles: A Framed Field Experiment with Coffee Farmers in Colombia

Commodity price cycles can arise when there is a tendency to invest more (less) when current prices are high (low). Traditionally this behavior is interpreted as based upon naïve expectations. However, weak financial institutions can also cause this behavior. When borrowing is hard and saving is risky farmers cannot invest in periods with low prices because their income is too low, while in periods with high prices they have few alternatives than to invest the surplus in their farm. In this paper, we present a framed field experiment to analyze how Colombian small-scale coffee farmers make investment decisions. We vary the strength of the financial institutions and the lag between investment and production. Overall there is a positive relation between prices and investment, and this relation becomes stronger when the financial institutions become weaker.