Going beyond perfect rationality: drought risk, economic choices and the influence of social networks

Rianne Duinen (), Tatiana Filatova, Wander Jager () and Anne Veen ()
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Rianne Duinen: University of Twente
Wander Jager: Groningen University
Anne Veen: University of Twente

The Annals of Regional Science, 2016, vol. 57, issue 2, No 4, 335-369

Abstract: Abstract Theoretical and experimental studies from psychological and behavioral sciences show that heuristics and social networks play an important role in decision-making under risk. The goal of this paper is to investigate the effects of empirical social networks and different behavioral rules on farmers’ irrigation adoption under drought risk and its impacts on several macroeconomic indicators such as the rate of adaptation, water demand and regional agricultural income. We present an application of a spatial economic ABM which is able to simulate the effect of droughts on crop production, farm income and farm decision-making. The agents’ population is parameterized using survey data, including data on social networks. Four experiments are conducted combining two climate scenarios with two behavioral scenarios (maximizers vs. heuristic-based agents). The results show that the adoption process follows a different path in the scenario with heuristic-based farmers. The adoption of irrigation is slower in the short run due to reliance on information from social networks and farmers’ uncertainty regarding drought events. This results in agricultural income loss and a lower water demand in the short run compared to the scenario with maximizing agents.

Keywords: Q150 Drought; Irrigation; Farm, D010 Bounded rationality, D030 Heuristic Agent based model (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (13)

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DOI: 10.1007/s00168-015-0699-4

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