Self-protection and self-insurance in pest management: The role of risk preferences and beliefs

Farmers worldwide manage yield risk mostly by applying pesticides, with possible negative impacts on human health and the environment. To analyse these decisions, we set up a two-period model in which a farmer first decides whether to adopt preventive measures that lower the risk of pest infestation (self-protection), before deciding ex-post about pesticides application (self-insurance). These two decisions are found to be substitutes in most cases. Under some conditions, we show that more risk-averse farmers apply more pesticides (i.e., more self-insurance) and exert fewer preventive efforts (i.e., less self-protection). We illustrate these theoretical findings using simulations calibrated from real data on crop producers from France. Decisions seem primarily driven by the costs of prevention and pesticides and by farmers' risk beliefs, while farmers' risk aversion plays a relatively minor role.