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Risk Preferences and Environmental Uncertainty: Implications for Crop Diversification Decisions in Ethiopia

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  • Mare Sarr and Mintewab Bezabih

Abstract

To the extent that diversifying income portfolio is used as a strategy for shielding against production risk, both individual risk preferences and weather uncertainty could affect crop diversification decisions. This paper is concerned with empirically assessing the effects of risk preferences and rainfall variability on farm level diversity. Unique panel data from Ethiopia consisting of experimentally generated risk preference measures combined with rainfall data are employed in the analysis. The major contribution of this study is its explicit treatment of individual risk preferences in the decision to diversify, simultaneously controlling for environmental risk in the form of rainfall variability. Covariate shocks from rainfall variability are found to positively contribute to an increased level of diversity with individual risk aversion having a positive but less significant role. We find that rainfall variability in spring has a greater effect than rainfall variability summer—the major rainy season. This finding is in line with similar agronomic-meteorological studies. These results imply that in situ biodiversity conservation could be effective in areas with high rainfall variability. However, reduction in risk aversion, which is associated with poverty reduction, is likely to reduce in situ conservation.

Suggested Citation

  • Mare Sarr and Mintewab Bezabih, 2013. "Risk Preferences and Environmental Uncertainty: Implications for Crop Diversification Decisions in Ethiopia," Working Papers 322, Economic Research Southern Africa.
    • Handle: RePEc:rza:wpaper:322
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    Cited by:

    1. Ayenew, Habtamu Yesigat & Sauer, Johannes & Abate-Kassa, Getachew, 2015. "Expossure To Risk And Risk Management In Smallholder Agriculture," 55th Annual Conference, Giessen, Germany, September 23-25, 2015 209211, German Association of Agricultural Economists (GEWISOLA).
    2. Muraoka, Rie & Matsumoto, Tomoya & Jin, Songqing & Otsuka, Keijiro, 2015. "On the Possibility of a Maize Green Revolution in the Highlands of Kenya: An Assessment of Emerging Intensive Farming Systems," 2015 Conference, August 9-14, 2015, Milan, Italy 212033, International Association of Agricultural Economists.
    3. Salazar-Espinoza, César & Jones, Sam & Tarp, Finn, 2015. "Weather shocks and cropland decisions in rural Mozambique," Food Policy, Elsevier, vol. 53(C), pages 9-21.
    4. Josephson, Anna Leigh & Michler, Jeffrey D., 2015. "To Specialize or Diversify: Agricultural Diversity and Poverty Persistence in Ethiopia," 2015 Conference, August 9-14, 2015, Milan, Italy 212459, International Association of Agricultural Economists.
    5. Ayenew, Habtamu Yesigat & Sauer, Johannes & Abate-Kassa, Getachew, 2016. "Cost of Risk Exposure, Farm Disinvestment and Adaptation to Climate Uncertainties: The Case of Arable Farms in the EU," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235595, Agricultural and Applied Economics Association.
    6. Alem, Yonas & Colmer, Jonathan, 2013. "Optimal Expectations and the Welfare Cost of Climate Variability," Working Papers in Economics 578, University of Gothenburg, Department of Economics.
    7. F. G. Santeramo & B. K. Goodwin & F. Adinolfi & F. Capitanio, 2016. "Farmer Participation, Entry and Exit Decisions in the Italian Crop Insurance Programme," Journal of Agricultural Economics, Wiley Blackwell, vol. 67(3), pages 639-657, September.
    8. Sauer, Johannes & Finger, Robert, 2014. "Climate Risk Management Strategies in Agriculture – The Case of Flood Risk," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 172679, Agricultural and Applied Economics Association.
    9. Hayatullah Ahmadzai, 2017. "Status, patterns, and microeconomic drivers of the extent of diversity in crop production: Evidence from Afghanistan," Discussion Papers 2017-07, University of Nottingham, CREDIT.
    10. Asfaw, Solomon & Savastano, Sara, 2015. "Topic: Building Resilience to Climate Change Through Social Protection and Climate-Smart Agriculture: Synergies and Trade-offs," 2015 Conference, August 9-14, 2015, Milan, Italy 210963, International Association of Agricultural Economists.
    11. Tesfamicheal Wossen & Thomas Berger & Salvatore Di Falco, 2015. "Social capital, risk preference and adoption of improved farm land management practices in Ethiopia," Agricultural Economics, International Association of Agricultural Economists, vol. 46(1), pages 81-97, January.
    12. Karl S. Zimmerer & Steven J. Vanek, 2016. "Toward the Integrated Framework Analysis of Linkages among Agrobiodiversity, Livelihood Diversification, Ecological Systems, and Sustainability amid Global Change," Land, MDPI, Open Access Journal, vol. 5(2), pages 1-28, April.
    13. Mitter, Hermine & Heumesser, Christine & Schmid, Erwin, 2014. "Modelling robust crop production portfolios to assess agricultural vulnerability to climate change," 2014 International Congress, August 26-29, 2014, Ljubljana, Slovenia 182702, European Association of Agricultural Economists.
    14. Larson, Donald & Savastano, Sara & Murray, Siobhan & Palacios-Lopez, Amparo, 2015. "Are Women Less Productive Farmers? How Markets and Risk Affect Fertilizer Use, Productivity, and Measured Gender Effects in Uganda," 2015 Conference, August 9-14, 2015, Milan, Italy 212032, International Association of Agricultural Economists.
    15. Pacillo, Grazia, 2016. "Market participation, innovation adoption and poverty in rural Ghana," Economics PhD Theses 0916, Department of Economics, University of Sussex.
    16. Michler, Jeffrey D. & Josephson, Anna L., 2017. "To Specialize or Diversify: Agricultural Diversity and Poverty Dynamics in Ethiopia," World Development, Elsevier, vol. 89(C), pages 214-226.

    More about this item

    Keywords

    Crop diversity; Experimental risk preferences; Rainfall; Uncertainty;

    JEL classification:

    • Q57 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Ecological Economics
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions

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