Assessing farmers’ risk preferences and their determinants in a marginal upland area of Vietnam: a comparison of multiple elicitation techniques

Abstract

We examine the consistency of risk preference measures based on eight hypothetical elicitation methods and a lottery game applied to smallholder farmers in a marginal upland environment in Vietnam. Using these measures, we identify influencing factors of risk aversion via regression analysis, whereby unlike previous studies, we include several proxies of social capital such as social networks and norms. Data were collected from household heads and spouses separately in a random sample of 300 households. Although correlations between most of the various risk preference measures are all statistically highly significant, most are weak. On average, respondents have a high degree of risk aversion and specific characteristics—gender, age, idiosyncratic shocks, education, social norms, network‐reliance with extended family, and connections to local authorities—are significant determinants of risk preferences across most elicitation methods, whereas others—the household's dependency ratio, wealth, and covariate shocks—are significant in a few methods only. The explanatory power of the models is limited, indicating that other factors are likely to be of greater importance in determining risk preferences. The results can help target safety nets, encourage investments, and lead to the development of more applicable methods for assessing risk preferences of smallholders in developing countries.

Risk perception, attitudes towards risk and risk management: evidence and implications

“…Both ways to measure the risk attitude have a correlation of 0.48. The correlation is very significant, and it is higher than correlations between different measuring methods we find in the literature (e.g., Pennings and Smidts, 2000;Pennings and Garcia 2001;Maart-Noelck and Musshoff 2013;Nielsen et al 2013).…”

Towards a Theoretical Construct for Modelling Smallholders’ Forestland-Use Decisions: What Can We Learn from Agriculture and Forest Economics?

“…Human capital affects households' abilities to manage risk and is measured through different proxies such as education and access to extension services. More education is associated with an increase in risk preferences [116]. Access to extension services has the same effect [120].…”

“…Insurance markets are designed specifically to mitigate the effects of such risk but smallholder agriculture is notoriously under-insured. As a result, smallholders tend to exhibit strong preferences towards risk aversion when making agricultural investments and production decisions [115,116]. This implies that households prefer undertaking safe land-use activities with lower expected outcomes compared to riskier alternatives with higher expected values.…”

“…Gender effects risk preferences in many cultures with women commonly having higher levels of risk aversion than men [116,122]. Human capital affects households' abilities to manage risk and is measured through different proxies such as education and access to extension services.…”

“…Access to extension services has the same effect [120]. Age has the opposite effect with older households exhibiting a greater degree of risk aversion [116,120,122]. Household size, which is usually interpreted as a measure of labour supply or income diversification, is also correlated with an increase in risk preferences [119].…”