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Choices under Risk in Rural Peru

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  • Galarza, Francisco B.

    (University of Wisconsin, Madison)

Abstract

This paper estimates the risk preferences of cotton farmers in Southern Peru, using the results from a multiple-price-list lottery game. Assuming that preferences conform to two of the leading models of decision under risk--Expected Utility Theory (EUT) and Cumulative Prospect Theory (CPT)--we find strong evidence of moderate risk aversion. Once we include individual characteristics in the estimation of risk parameters, we observe that farmers use subjective nonlinear probability weighting, a behavior consistent with CPT. Interestingly, when we allow for preference heterogeneity via the estimation of mixture models--where the proportion of subjects who behave according to EUT or to CPT is endogenously determined--we find that the majority of farmers' choices are best explained by CPT. We further hypothesize that the multiple switching behavior observed in our sample can be explained by nonlinear probability weighting made in a context of large random calculation mistakes; the evidence found on this regard is mixed. Finally, we find that attaining higher education is the single most important individual characteristic correlated with risk preferences, a result that suggests a connection between cognitive abilities and behavior towards risk.

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Bibliographic Info

Paper provided by University of Wisconsin, Agricultural and Applied Economics in its series Staff Paper Series with number 542.

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Date of creation: Oct 2009
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Handle: RePEc:ecl:wisagr:542

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Citations

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Cited by:
  1. Francisco Galarza & Michael Carter, 2011. "Risk Preferences and Demand for Insurance in Peru: A Field Experiment," Working Papers, Departamento de Economía, Universidad del Pacífico 11-08, Departamento de Economía, Universidad del Pacífico, revised Jan 2011.
  2. Charness, Gary & Viceisza, Angelino, 2011. "Comprehension and risk elicitation in the field: Evidence from rural Senegal," IFPRI discussion papers, International Food Policy Research Institute (IFPRI) 1135, International Food Policy Research Institute (IFPRI).
  3. Ihli, Hanna Julia & Chiputwa, Brian & Musshoff, Oliver, 2013. "Do Changing Probabilities or Payoffs in Lottery-Choice Experiments Matter? Evidence from Rural Uganda," Discussion Papers 158146, Georg-August-Universitaet Goettingen, GlobalFood, Department of Agricultural Economics and Rural Development.
  4. Bocqueho, Geraldine & Jacquet, Florence & Reynaud, Arnaud, 2011. "Expected Utility or Prospect Theory Maximizers? Results from a Structural Model based on Field-experiment Data," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland, European Association of Agricultural Economists 114257, European Association of Agricultural Economists.
  5. Norbert Hirschauer & Oliver Musshoff & Syster C. Maart-Noelck & Sven Gruener, 2014. "Eliciting risk attitudes -- how to avoid mean and variance bias in Holt-and-Laury lotteries," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 21(1), pages 35-38, January.
  6. Kerri Brick & Martine Visser & Justine Burns, 2012. "Risk Aversion: Experimental Evidence from South African Fishing Communities," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 94(1), pages 133-152.
  7. Joseph Cook & Susmita Chatterjee & Dipika Sur & Dale Whittington, 2013. "Measuring risk aversion among the urban poor in Kolkata, India," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 20(1), pages 1-9, January.
  8. Galarza, Francisco, 2009. "Risk, Credit, and Insurance in Peru: Field Experimental Evidence," MPRA Paper 17833, University Library of Munich, Germany.
  9. Lybbert, Travis J. & Galarza, Francisco B. & McPeak, John G. & Barrett, Christopher B. & Boucher, Stephen R. & Carter, Michael R. & Chantarat, Sommarat & Fadlaoui, Aziz & Mude, Andrew G., 2010. "Dynamic Field Experiments in Development Economics: Risk Valuation in Morocco, Kenya, and Peru," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, Northeastern Agricultural and Resource Economics Association, vol. 39(2), April.

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