Risk and ambiguity aversion: Incentives or disincentives for adoption of improved agricultural land management practices?

Amanuel Hadera and Tewodros Tadesse

Agricultural Economics, 2023, vol. 54, issue 6, 867-883

Abstract: Farmers grapple with uncertainties related to the adoption of improved agricultural practices. Adoption decisions on these practices may vary in response to risk in which farmers may be able to predict the chances of occurrence on outcomes of their decisions, and/or ambiguity where adoption‐decision outcome probabilities are unknown. Also, these uncertainties may emanate from imperfect information on production returns from adoption and adoption‐related fixed costs. In this paper, we study whether risk and ambiguity aversion create incentives or disincentives for intensity and duration of adoption of improved agricultural practices. For this, we combine experimental with survey data. We find that ambiguity aversion reduces incentives for high‐intensity adoption while risk aversion attenuates this disincentive. As expected, risk aversion increases incentives for longer adoption of improved agricultural practices. Experience was expected to allow farmers to learn enough about payoff probabilities from adoption and render ambiguity aversion less important. Yet, we find it reduces the duration of adoption of soil and water conservation structures, which could be explained by adoption‐related high fixed costs. On the other hand, ambiguity aversion appears to matter little with adoption of agroforestry despite the associated high fixed and management costs attributed to integrated agri‐silviculture and agro‐silvopastoral systems. Given the complementary nature of the practices, agricultural policy should be directed at interventions that attenuate the deterrent effect of ambiguity aversion through providing information related to production returns from the adoption of improved practices that involve high fixed (management) costs.

Date: 2023
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