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Reducing Negative Effects of Risk Aversion on Farming Outcomes: Evidence for Systematic External Selection into Profitable Contracts

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  • Kopp, Thomas
  • Dsouza, Alwin
  • Mishra, Ashok K.

Abstract

Risk aversion among farmers in developing and emerging economies (DEE) often leads to underinvestment and lower profitability. However, contract farming may mitigate these negative effects by providing stability and resources. This study examines the selection of farmers into contract types, hypothesizing that production contract firms prefer risk-averse farmers due to their compliance and adherence to strict guidelines. Using survey data from 660 okra farmers in Karnataka, India, we apply an instrumental variable approach to address endogeneity. The results confirm that risk-averse farmers are disproportionately selected for production contracts, which offer significantly higher profitability than marketing contracts. Moreover, while risk aversion generally reduces farm profitability, the benefits of production contracts outweigh this disadvantage. These findings suggest that contract farming can improve the economic outcomes of vulnerable farm households. From a policy perspective, facilitating access to production contracts may enhance farm resilience and sustainability.

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Handle: RePEc:ags:aes025:356801
DOI: 10.22004/ag.econ.356801
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