Risk aversion in low income countries: Experimental evidence from Ethiopia
Leading Organization:International Food Policy Research Institute (IFPRI)
Production systems in low-income developing countries are generally poorly diversified, focusing on rainfed staple crop production and raising livestock. These activities are inherently risky, and investment and production decisions by farm households are therefore made within environments that are affected by risk. Because of poorly developed or absent credit and insurance markets it is difficult to pass any of these risks to a third party.
As a result, it is often found that even when the expected net return is high, households are reluctant to adopt new agricultural technologies when they involve risk. Better understanding risk behavior will be essential for identifying appropriate farm-level strategies for adaptation to climate change by low-income farmers. This paper uses an experimental approach applied to 262 households in the Ethiopian highlands. We find that more than 50 percent of the households are severely or extremely risk averse. Promotion of technologies with downside risks – even if the upside potential is enormous – should therefore be combined with insurance or other support.0