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Manuela Meraner, Robert Finger
Agricultural Economics and Policy Group ETHZ
The impact of risk perception and
preferences on risk management strategies:
Evidence for German livestock farmers
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Motivation: decision making process
Source: Own depiction according to van Raaij (1981)
Risk management
strategy
Farm, farmer`s and household characteristics
Risk perception
Risk preferences
Manuela Meraner 03.10.2016
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1. How are farm, farmer’s and household characteristics
(incl. risk perception) related to the choice of risk
management strategies?
2. Which risk attitude parameter elicited from different risk
elicitation methods pertains the farmers’ risk behavior
best?
4
Research Questions
Manuela Meraner 03.10.2016
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Paper pencil survey
December 2015 and January 2016
64 farmers in North-Rhine-Westphalia, response rate = 26%
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Experimental Design
1
2
3
Number of agric.
holdings in
municipality
Manuela Meraner 03.10.2016
Source: Own depiction
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Risk management strategies
Risk management
strategies
On-farm agriculture:- Agricultural diversification- Investment in technologies- Risk adapted production- Resistant species
On-farm non-agriculture:- Non-agricultural diversification- Work harder/cut private expenses- Cooperation with other farmers- Holding financial reserves
Off-farm:- Forward contracting- Off farm work- Off farm investment- Insurance
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Methodology
Manuela Meraner 03.10.2016
Group farmer`s choice of risk management strategy: max. mean in each category
Multinomial probit model:
𝑦𝑖𝑗∗ = 𝛽𝑖𝑗𝑥𝑖𝑗 + 𝜀𝑖𝑗 𝜀𝑖𝑗 ~ 𝑁 0, 𝛴 and 𝑗 = (0…2)
with 𝑦𝑖 =
1 if 𝑦𝑖 𝑜𝑛−𝑓𝑎𝑟𝑚 𝑎𝑔𝑟𝑖𝑐𝑢𝑙𝑡𝑢𝑟𝑒∗ > 0
2 if 𝑦𝑖 𝑜𝑛−𝑓𝑎𝑟𝑚 𝑛𝑜𝑛−𝑎𝑔𝑟𝑖𝑐𝑢𝑙𝑡𝑢𝑟𝑒∗ > 0
0 otherwise.
𝑥𝑖𝑗 = vector of observable farm and farmer characteristics
on-farm agric. mean
0.50
on-farm non-agric. mean
0.25
off-farm mean
0.28
xij = risk preferences, risk perception, age, risk literacy, experienced past losses,
succession, agricultural area, proportion rented land, livestock: pig/piglet, dairy cattle
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Risk preference elicitation: 20+ different methods, high between
method inconsistencies ( different methods show different risk
preferences of the same individual)
Use three methods to elicit risk preferences:
1. Multiple price list (MPL) (Holt and Laury 2002)
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Risk preferences I
Contextualized lottery
with 10 agricultural
investment decisions
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2. Self-assessment of general attitude towards risk (Dohmen et al. 2009)
3. Business statements of relative risk preferences in four different
domains (Meuwissen et al. 2001)
i. “I am willing to take on more risks than my colleagues with respect to
production.” (1 = agree, 5 = disagree)
ii. “I am willing to take on more risks than my colleagues with respect to marketing
and prices.” (1 = agree, 5 = disagree)
iii. “I am willing to take on more risks than my colleagues with respect to finances.”
(1 = agree, 5 = disagree)
iv. “I am willing to take on more risks than my colleagues with respect to
agriculture in general.” (1 = agree, 5 = disagree)
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Risk preferences II
Higher positive values more risk aversion
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Risk perception
Risk
score
Probability that
uncertainty happens
Impact/ negative
consequence of occurrence
Market and
price risk
Political /
structural risks
Production risk Financial risk Other risks (legal /
environmental)
Score on a five point scale
(1 = very unlikely; 5 = very likely)
Score on a five point scale
(1 = very small impact; 5 = very strong impact)
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Results: How are farm and farmer’s characteristics related
to the choice of risk management strategies?
Farmer characteristics
Age - +
Age2 + -
Risk illiteracy + +
Perceived mp risk -
Perceived other risk +
Experienced past losses + +
Household characteristics
Succession +
Farm characteristics
Agricultural area -
Proportion rented land -
Livestock: pig/piglet +
Livestock: dairy cattle +
Risk aversion
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Results: Which risk attitude parameter elicited from three
different risk elicitation methods pertains the farmers’ risk
behavior best?
Risk aversion
Multiple price list +
Self-assessment +
Ø Business statement +
Business statement: production +
Business statement: marketing and prices +
Business statement: finances +
Business statement: agriculture generally +
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Risk perception and risk aversion are directly
influencing the decision of risk management
strategies applied
Greater risk aversion increases the probability
that farmer’s focus on on-farm strategies
(compared to choosing off-farm strategies)
Simultaneous analysis of risk management tools
is essential
03.10.2016Manuela Meraner 13
Conclusion
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|| 03.10.2016Manuela Meraner 14
Thank you for your
attention!
http://www.aecp.ethz.ch/
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References
Dohmen, Thomas; Falk, Armin; Huffman, David; Sunde, Uwe; Schupp, Jürgen; Wagner, Gert G.; Berlin, D. I.W. (2009): Individual
Risk Attitudes: Measurement, Determinants and Behavioral Consequences. Journal of the European Economic
Association 9 (3), 522–550.
Holt, C.A., Laury, S.K., 2002. Risk aversion and incentive effects. American economic review 92 (5), 1644–1655.
Meuwissen, M. P. M., R. B. M. Huirne, and J. B. Hardaker. "Risk and risk management: an empirical analysis of Dutch livestock
farmers." Livestock Production Science 69.1 (2001): 43-53.
van Raaij, W. F. (1981). Economic psychology. Journal of Economic Psychology 1(1): 1–24.