Empirical estimation of risk preference structure among maize farmers: a case study of Wa District
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Date
2007-08-25
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Abstract
This study attempts to find out the risk attitudes of some selected maize farmers in the face of risk within the Wa Municipality. Individual risk attitudes of respondents were estimated and analysed. Further, the effects of some socio-economic variables on farmer's response to risk were estimated and analysed. The strategies employed by farmers in mitigating such risk and general perception of irisks in the maize industry were also analysed. '
The risk attitudes of farmers were determined using the Arrow-Pratt measure of risk aversion after
having elicited farmer's certainty equivalents from comparable choices. Psychometric scales or Likert-type scales and descriptive statistics were used in obtaining estimates on the perception of farmers on risk.
The study revealed that the most patronized risk management tools in the district are storage, diversification and adjusting input use. The rest are production and marketing contract (although the crop of interest culturally is not grown for sale but consumption). The respondents rated diversification, adjusting input use and off-farm employment as the most effective strategies in combating risk with being a low cost producer, maintaining financial reserves and liquidity having been regarded as not being effective. Off-farm employment and adjusting input use and outputs were perceived as the strategies that are most comfortable to use.
On the perceptions of sources of risk, changes in weather, personal health and family plans were perceived as being the major source of risk in the district's agriculture; which is contrary to that of earlier findings where output and yield risk have always been cited as the major source of variability. This is an indication of the non-economic goals that the district attaches to the cultivation of the maize crop and therefore fails to integrate monetary risk in evaluating the riskiness of the whole enterprise.
The risk aversion coefficients estimates obtained from the study suggest a risk loving tendency (not risk averse), decision makers in the standard economic sense. One hundred and twenty-six (126) out of one hundred and fourteen (114) estimated Arrow-Pratt risk coefficients suggest risk loving attitudes. This result therefore suggests that farmers are likely to behave in a risk loving manner when contemplating decisions in enterprises with less commercial approach. Farmers behave in a risk averse manner only when decisions have the potential of offsetting their overall wealth status. -
The information criteria suggest the cubic utility function as the most reliable and whose estimates pan be relied upon for meaningful policy formulation.
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A dissertation submitted to the Kwame Nkrumah University of Science and Technology in partial fulfilment for the requirements of the award of Master of Science in Agricultural Economics, 2007