Examining the Role of Risk Attitudes in Agricultural Management Decisions in Emerging and Developing Countries: Experimental Evidence

Abstract

Farmers are constantly faced with numerous agricultural risks and have to make decisions in an uncertain and changing environment. Numerous studies have been carried out to understand and better manage decision-making under risk. However, many of these studies conducted in emerging and developing countries examining the determinants of agricultural risk management and coping decisions either did not consider risk attitudes or relied on self-reported measures. In addition, some of the experimental research conducted in developed countries or research that used non-farmer convenience samples lacks external validity due to variations in socio-economic, institutional, environmental, contextual and circumstantial factors. Thus, this chapter’s objective was to elicit farmers’ risk preferences via an experimental method and determine if risk preferences explain the decision to adopt practices and strategies often reported to be driven by risk and risk aversion. This chapter analyzes survey data from India (5732) and Nepal (570). The results show that farmers in the sample mostly avoided taking risks when faced with a decision with financial outcomes. Those averse to risk are more likely to stick with traditional crops than to adopt hybrid or improved crop varieties and practice crop diversification. Contrary to most findings, farmers more averse to risk are less likely than their risk-loving counterparts to use synthetic fertilizer and less likely to have off-farm sources of income. However, risk preferences do not influence the likelihood that farmers will take up sharecropping and crop insurance. The recommendations are that policy should focus on reducing the risk farmers face and should target empowering farmers to manage risk on their own through increased access to a range of instruments and strategies. Direct technical, financial and institutional support will help shift many farmers from ex-post crisis management to ex-ante risk management and help ensure that farmers’ livelihoods are resilient.