The impact of risk on inequality: evidence from the Irish agricultural sector
The goal of the present paper is to test the hypothesis that risk has an impact on inequality. Many studies investigating the behaviour of farmers under risk have concluded that poorer farmers tend to reduce their risk by reducing proportionally more their expected gross margin than the wealthier ones because they are more risk averse and less protected against risk. This would be the driving force behind the distributional impact of risk. Here we propose a direct way to test this hypothesis by decomposing income inequality in its different sources in order to understand the importance of risk compared to other factor in explaining inequality. We applied the method to a dataset of repeated cross-sectional data on the Irish agriculture and we found that risk explains up to 20% of inequality once other factors are controlled for. Furthermore, we have seen that this impact has risen over time but that this increase could be stopped by mitigating the impact of risk on farmers with proper risk management tools. Lastly, we observe that this rise coincides with the rise in market risk linked to lowering of price support implemented under the reforms of pillar I of the Common Agricultural Policy(CAP). It is therefore likely that the distributional impact of risk is going to be high over the next decade because the planned lowering of market supports under the next reform of the CAP.
|Date of creation:||May 2011|
|Contact details of provider:|| Postal: Houghton Street, London WC2A 2AE|
Phone: +44 (020) 7405 7686
Web page: http://www.lse.ac.uk/grantham.
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ben Groom & Phoebe Koundouri & Celine Nauges & Alban Thomas, 2008. "The story of the moment: risk averse cypriot farmers respond to drought management," Applied Economics, Taylor & Francis Journals, vol. 40(3), pages 315-326.
- Dercon, Stefan, 1996.
"Risk, Crop Choice, and Savings: Evidence from Tanzania,"
Economic Development and Cultural Change,
University of Chicago Press, vol. 44(3), pages 485-513, April.
- Stefan Dercon, 1993. "Risk, crop choice and saving: evidence from Tanzania," CSAE Working Paper Series 1993-02, Centre for the Study of African Economies, University of Oxford.
- Ravallion, Martin, 1988. "Expected Poverty under Risk-Induced Welfare Variability," Economic Journal, Royal Economic Society, vol. 98(393), pages 1171-1182, December.
- Anthony F. Shorrocks, 1983. "The Impact of Income Components on the Distribution of Family Incomes," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 311-326.
- Bourguignon, Francois, 1979. "Decomposable Income Inequality Measures," Econometrica, Econometric Society, vol. 47(4), pages 901-920, July.
- Hans P. Binswanger, 1980. "Attitudes Toward Risk: Experimental Measurement in Rural India," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 62(3), pages 395-407.
- Hans Binswanger, 1980. "Attitudes toward risk: Experimental measurement in rural india," Artefactual Field Experiments 00009, The Field Experiments Website.
- Ethan Ligon & Laura Schechter, 2003. "Measuring Vulnerability," Economic Journal, Royal Economic Society, vol. 113(486), pages 95-102, March.
- Ligon, Ethan & Schechter, Laura, 2002. "Measuring Vulnerability," 2002 Annual meeting, July 28-31, Long Beach, CA 19899, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
- Ligon, Ethan & Laura Schechter, 2002. "Measuring Vulnerability," Royal Economic Society Annual Conference 2002 128, Royal Economic Society.
- Salvatore Di Falco & Jean-Paul Chavas, 2007. "On Crop Biodiversity, Risk Exposure, and Food Security in the Highlands of Ethiopia," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(3), pages 599-611.
- Bruce A. Babcock & David A. Hennessy, 1996. "Input Demand under Yield and Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 416-427.
- Bruce A. Babcock & Joseph A. Herriges, 1994. "Input Demand Under Yield and Revenue Insurance," Center for Agricultural and Rural Development (CARD) Publications 94-wp127, Center for Agricultural and Rural Development (CARD) at Iowa State University.
- Babcock, Bruce A. & Hennessy, David A., 1996. "Input Demand under Yield and Revenue Insurance," ISU General Staff Papers 199601010800001155, Iowa State University, Department of Economics.
- Babcock, Bruce A. & Hennessy, David A., 1996. "Input Demand Under Yield and Revenue Insurance," Staff General Research Papers Archive 794, Iowa State University, Department of Economics.
- Oaxaca, Ronald, 1973. "Male-Female Wage Differentials in Urban Labor Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(3), pages 693-709, October.
- Thomas Lemieux, 2002. "Decomposing changes in wage distributions: a unified approach," Canadian Journal of Economics, Canadian Economics Association, vol. 35(4), pages 646-688, November.
- Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
- Salvatore Di Falco & Jean-Paul Chavas, 2006. "Crop genetic diversity, farm productivity and the management of environmental risk in rainfed agriculture," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 33(3), pages 289-314, September.
- Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
- Gamanou, Gisele & Morduch, Jonathan, 2002. "Measuring Vulnerability to Poverty," WIDER Working Paper Series 058, World Institute for Development Economic Research (UNU-WIDER).
- Bourguignon, Francois & Fournier, M & Gurgand, M, 2001. "Fast Development with a Stable Income Distribution: Taiwan, 1979-94," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 47(2), pages 139-163, June.
- Guanghua Wan & Zhangyue Zhou, 2005. "Income Inequality in Rural China: Regression-based Decomposition Using Household Data," Review of Development Economics, Wiley Blackwell, vol. 9(1), pages 107-120, 02.
- Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
- Shorrocks, Anthony F, 1984. "Inequality Decomposition by Population Subgroups," Econometrica, Econometric Society, vol. 52(6), pages 1369-1385, November.
- Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
- Berry, Charles H, 1971. "Corporate Growth and Diversification," Journal of Law and Economics, University of Chicago Press, vol. 14(2), pages 371-384, October.
- Antle, John M, 1983. "Testing the Stochastic Structure of Production: A Flexible Moment-based Approach," Journal of Business & Economic Statistics, American Statistical Association, vol. 1(3), pages 192-201, July.
- Fields, Gary S & Yoo, Gyeongjoon, 2000. "Falling Labor Income Inequality in Korea's Economic Growth: Patterns and Underlying Causes," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 46(2), pages 139-159, June.
- Alan S. Blinder, 1973. "Wage Discrimination: Reduced Form and Structural Estimates," Journal of Human Resources, University of Wisconsin Press, vol. 8(4), pages 436-455.
- Chavas, Jean-Paul & Holt, Matthew T, 1996. "Economic Behavior under Uncertainty: A Joint Analysis of Risk Preferences and Technology," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 329-335, May.
- Shorrocks, A F, 1982. "Inequality Decomposition by Factor Components," Econometrica, Econometric Society, vol. 50(1), pages 193-211, January. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:lsg:lsgwps:wp47. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (The GRI Administration)
If references are entirely missing, you can add them using this form.