This is a chapter in a book entitled "Agricultural Investment and Productivity: Building Sustainability in East Africa" edited by Gunnar Köhlin and Randall Bluffstone, 2011.
Farm households in most developing countries face a multitude of risk, including those such as poor weather, price fluctuations, and pests. In many of these countries, credit and insurance markets are incomplete or missing, implying that households cannot pass risks to third parties. In the presence of such market failures, endowments determine many of the risk responses that affect farm investment decisions.
Literature shows that the impact of risk on the decision to adopt and use farm technologies such as crop biodiversity critically depends on the risk properties of those technologies and the degree of consumption risk facing households. Risk-averse households are less likely to adopt risk-increasing technologies and vise-versa. Households also adopt if they have no other choice. Other researches indicate that risk aversion could have a positive or negative correlation with fertilizer adoption (Yesuf, 2004; Hagos and Holden, 2001). With few exceptions all studies use hypothetical experiment to measure risk attitudes, which can yield hypothetical bias. This chapter uses real payoff experimental data to measure farmers’ risk aversion. We then apply those findings to the problem of understanding the role of risk preferences in chemical fertilizer adoption in the Ethiopian highlands.
The results show that in the Ethiopian highlands risk aversion is very high by any standards and that livestock which is the most common store of wealth, is found to be a significant determinant of risk behavior, which suggests that wealth and capital accumulation are perhaps the most direct way to reduce risk averting behavior in the presence of missing capital and insurance markets. Plot characteristics are important depending on specific sites but risk preferences are by far the most important parameters affecting both the adoption and intensity of fertilizer use in areas where rainfall is highly erratic and farmers have repeated experience with drought and crop failures.
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