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The story of the moment: risk averse cypriot farmers respond to drought management

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Author Info

  • Ben Groom
  • Phoebe Koundouri
  • Celine Nauges
  • Alban Thomas

Abstract

This article illustrates the importance of estimating risk preferences when evaluating water policy. Using agricultural production data from the Kiti region of Cyprus we estimate farmers' risk preferences a la Antle (Journal of Business and Economic Statistics, 1, 192-201, 1983, American Journal of Agricultural Economics, 69, 509-22, 1987) and show sensitivity to higher order moments of profit, such as skewness. We show that farmers in the Kiti region are risk averse with risk premiums in the region of 20% of expected profit. We use these estimates to analyse the impact of a water quota from the perspective of three policy-makers who differ only in their understanding of farmers' risk preferences. We show in the case of Kiti that policy-makers who model risk preferences incorrectly, that is, either; (a) assume risk neutrality or; (b) ignore down-side risk, wrongly predict the magnitude and direction of input responses and therefore the magnitude of welfare changes. This highlights the importance of accommodating preferences for higher order moments of profit in the evaluation of water policy.

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Bibliographic Info

Article provided by Taylor and Francis Journals in its journal Applied Economics.

Volume (Year): 40 (2008)
Issue (Month): 3 ()
Pages: 315-326

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Handle: RePEc:taf:applec:v:40:y:2008:i:3:p:315-326

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Cited by:
  1. Sébastien Foudi, 2012. "Exploitation of soil biota ecosystem services in agriculture: a bioeconomic approach," Working Papers 2012-02, BC3.
  2. Abdulai, Awudu & Owusu, Victor & Bakang, John-Eudes A., 2011. "Adoption of safer irrigation technologies and cropping patterns: Evidence from Southern Ghana," Ecological Economics, Elsevier, vol. 70(7), pages 1415-1423, May.
  3. Claire Mosnier & Arnaud Reynaud & Alban Thomas & Michel Lherm & Jacques Agabriel, 2009. "Estimating a production function under production and output price risks: An application to beef cattle in France," LERNA Working Papers 09.10.286, LERNA, University of Toulouse.
  4. Xavier Vollenweider & Salvatore Di Falco & Cathal O’Donoghue, 2011. "Risk preferences and voluntary agrienvironmental schemes: does risk aversion explain the uptake of the Rural Environment Protection Scheme?," Grantham Research Institute on Climate Change and the Environment Working Papers 48, Grantham Research Institute on Climate Change and the Environment.
  5. Tveteras, Ragnar & Flaten, Ola & Lien, Gudbrand D., 2008. "Production risk in multi-output industries: estimates from Norwegian dairy farms," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 43958, European Association of Agricultural Economists.
  6. Kim, Kwansoo & Chavas, Jean-Paul & Barham, Bradford L. & Foltz, Jeremy D., 2012. "Rice, Irrigation and Downside Risk: A Quantile Analysis of Risk Exposure and Mitigation on Korean Farms," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124814, Agricultural and Applied Economics Association.
  7. Vollenweider, Xavier & Di Falco, Salvatore & O'Donoghue, Cathal, 2011. "The Impact Of Risk On The Inequality: Evidences From The Irish Agricultural Sector," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 115553, European Association of Agricultural Economists.
  8. Xavier Vollenweider & Salvatore Di Falco & Cathal O’Donoghue, 2011. "The impact of risk on inequality: evidence from the Irish agricultural sector," Grantham Research Institute on Climate Change and the Environment Working Papers 47, Grantham Research Institute on Climate Change and the Environment.
  9. Yesuf, Mahmud & Kassie, Menale & Köhlin, Gunnar, 2009. "Risk Implications of Farm Technology Adoption in the Ethiopian Highlands," Working Papers in Economics 404, University of Gothenburg, Department of Economics.
  10. Juma, Maurice & Nyangena, Wilfred & Yesuf, Mahmud, 2090. "Production Risk and Farm Technology Adoption in Rain-Fed, Semi-Arid Lands of Kenya," Discussion Papers dp-09-22-efd, Resources For the Future.
  11. Ranganathan, C. & Palanisami, K. & Kakumanu, K. & Baulraj, A., 2011. "Mainstreaming the Adaptations and Reducing the Vulnerability of the Poor due to Climate Change," ADBI Working Papers 333, Asian Development Bank Institute.
  12. Ogada, Maurice Juma & Nyangena, Wilfred & Yesuf, Mahmud, 2010. "Production risk and farm technology adoption in the rain-fed semi-arid lands of Kenya," Journal of Cooperatives, NCERA-210, vol. 4(2), June.
  13. Finger, Robert, 2011. "Reductions of Agricultural Nitrogen Use Under Consideration of Production and Price Risks," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114356, European Association of Agricultural Economists.
  14. Vollenweider, Xavier & Di Falco, Salvatore & O'Donoghue, Cathal, 2011. "Risk Preferences and Voluntary Agri-environmental Schemes: Does Risk Aversion Explain the Uptake of the Rural Environment Protection Scheme?," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 115552, European Association of Agricultural Economists.
  15. Vangelis TZOUVELEKAS & Celine Nauges & Phoebe Koundouri & Margarita Genius, . "Information Spillovers in Irrigation Technology Diffusion: Social Learning, Extension Visits and Spatial Effects," DEOS Working Papers 1133, Athens University of Economics and Business.
  16. Sauer, Johannes, 2011. "Natural Disasters and Agriculture: Individual Risk Preference towards Flooding," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 115989, European Association of Agricultural Economists.

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