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Does Market Experience Attenuate Risk Aversion? Evidence from Landed Farm Households in Ethiopia

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  • Melesse, Mequanint B.
  • Cecchi, Francesco

Abstract

Risk preferences are important drivers of many relevant economic decisions of farm households. High risk aversion is a well-known trigger of “poverty traps” for farm households in developing countries. This paper analyzes the effect of market experience on risk aversion for a relatively large sample of landed farm households characterized by historically low mobility in Ethiopia. We measure risk aversion using lab-in-field experimental data, and relate it to actual market experience of household heads. We use an instrumental variable approach to address the issue of endogeneity due to possible self-selection into trade. We find that market experience attenuates risk aversion––farm households with greater market experience are more risk tolerant. Results are robust to using several alternative specifications, controlling for internal mobility, out-migration and other potential unobservables, and for violations to rational choice. Overall, this study provides strong empirical evidence that risk preferences endogenously change as a result of market experience, and can help design policies aiming to increase the productivity and efficiency of farm households.

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  • Melesse, Mequanint B. & Cecchi, Francesco, 2017. "Does Market Experience Attenuate Risk Aversion? Evidence from Landed Farm Households in Ethiopia," World Development, Elsevier, vol. 98(C), pages 447-466.
  • Handle: RePEc:eee:wdevel:v:98:y:2017:i:c:p:447-466
    DOI: 10.1016/j.worlddev.2017.05.011
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    Cited by:

    1. Kaelab K. Haile & Eleonora Nillesen & Nyasha Tirivayi, 2019. "Impact of Formal Climate Risk Transfer Mechanisms on Risk-Aversion: Empirical Evidence from Rural Ethiopia," CESifo Working Paper Series 7717, CESifo.
    2. Kibrom A. Abay & Nathaniel D. Jensen, 2020. "Access to markets, weather risk, and livestock production decisions: Evidence from Ethiopia," Agricultural Economics, International Association of Agricultural Economists, vol. 51(4), pages 577-593, July.
    3. Haile, Kaleab K. & Nillesen, Eleonora & Tirivayi, Nyasha, 2020. "Impact of formal climate risk transfer mechanisms on risk-aversion: Empirical evidence from rural Ethiopia," World Development, Elsevier, vol. 130(C).

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