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Modeling heterogeneous risk preferences

Modeling heterogeneous risk preferences PurposeThe purpose of this paper is to propose a general framework for modeling heterogeneous risk preferences of agricultural producers and identifying the underlying factors that affect risk preferences.Design/methodology/approachThis paper nests the risk preference function in a general production decision framework to test and model producers’ risk preferences. The framework allows for both production and price risk, and accommodates potential inefficient behavior. Panel data and the GMM method are used in the empirical estimation.FindingsThe results in this study confirmed the hypothesis of heterogeneous risk preferences. Farmers are found to have decreasing absolute risk aversion. Both farmer characteristics and socioeconomic factors have significant impact on producers’ risk preferences. The results suggest that ignoring heterogeneity in risk preferences across individuals and how non-wealth variables could affect farmers’ risk preferences could result in biased economic behavior analysis.Originality/valueIt is generally assumed in the literature that risk preferences are homogeneous among farmers at given wealth. This is a strong assumption and there are abundant evidences that suggest otherwise. This paper makes contributions to the literature by proposing an approach to modeling heterogeneous risk preferences and identifying the factors that affect preferences. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Agricultural Finance Review Emerald Publishing

Modeling heterogeneous risk preferences

Agricultural Finance Review , Volume 77 (2): 13 – Jul 3, 2017

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
0002-1466
DOI
10.1108/AFR-03-2015-0016
Publisher site
See Article on Publisher Site

Abstract

PurposeThe purpose of this paper is to propose a general framework for modeling heterogeneous risk preferences of agricultural producers and identifying the underlying factors that affect risk preferences.Design/methodology/approachThis paper nests the risk preference function in a general production decision framework to test and model producers’ risk preferences. The framework allows for both production and price risk, and accommodates potential inefficient behavior. Panel data and the GMM method are used in the empirical estimation.FindingsThe results in this study confirmed the hypothesis of heterogeneous risk preferences. Farmers are found to have decreasing absolute risk aversion. Both farmer characteristics and socioeconomic factors have significant impact on producers’ risk preferences. The results suggest that ignoring heterogeneity in risk preferences across individuals and how non-wealth variables could affect farmers’ risk preferences could result in biased economic behavior analysis.Originality/valueIt is generally assumed in the literature that risk preferences are homogeneous among farmers at given wealth. This is a strong assumption and there are abundant evidences that suggest otherwise. This paper makes contributions to the literature by proposing an approach to modeling heterogeneous risk preferences and identifying the factors that affect preferences.

Journal

Agricultural Finance ReviewEmerald Publishing

Published: Jul 3, 2017

References