RISK AVERSION AND AGRICULTURAL DECISION MAKING UNDER UNCERTAINTY: EVIDENCE FROM RURAL CÔTE D IVOIRE Euphrasie B.H. KOUAME United Nations University Institute for Natural Resources in Africa
Problem statement 1/1 Risk is a central issue that affects many different aspects of people s livelihoods in the developing world. In rural Africa, risk is present in all management decisions of agricultural systems, as a result of price, climate and resource uncertainty. In Côte d Ivoire, rural households producing are exposed to a variety of income uncertainties affecting their daily life. Response: farmers rely on several kinds of informal arrangements and institutions which only mitigate a small part of overall risk. Need to make modern risk management instruments like insurance available to farmers: Knowledge of farmers attitude toward risk Knowledge of existing risks and risk management strategies knowledge of their interest in formal insurance 2
Problem statement 1/1 Risk is a central issue that affects many different aspects of people s livelihoods in the developing world. In rural Africa, risk is present in all management decisions of agricultural systems, as a result of price, weather and resource uncertainty. In Côte d Ivoire, rural farm households producing are exposed to a variety of income uncertainties affecting their daily life. Response: farmers rely on several kinds of informal arrangements and institutions which only mitigate a small part of overall risk. Need to make modern risk management instruments like insurance available to farmers: Knowledge of farmers attitude towards risk Knowledge of existing risks and risk management strategies knowledge of their interest in formal insurance 3
Objectives 1/1 Overall objective: Analyze Ivorian farmers behavioural responses to risk and uncertainty Specifically, this research intends to: Measure the attitudes toward risk among farmers; Identify the main sources of risk faced by farmers and their risk perceptions; Examine the risk management strategies used by producers and investigate the factors that drive their risk management decisions; Discuss the role of insurance as an effective tool in managing weather risks in agriculture and assesses small scale farmers interest in hypothetical insurance schemes. 4
Objectives 1/1 Overall objective: Analyze Ivorian farmers behavioural responses to risk and uncertainty Specifically, this research intends to: Measure the attitudes toward risk among farmers; Identify the main sources of risk faced by farmers and their risk perceptions; Examine the risk management strategies used by producers and investigate the factors that drive their risk management decisions; Discuss the role of insurance as an effective tool in managing weather risks in agriculture and assesses small scale farmers interest in hypothetical insurance schemes. 5
Methodology 1/2 Eliciting farmers risk aversion behaviour: Experimental gambling approach with real money payment Risk perception: Use of 5 point scale from 1 (no impact) to 5 (high impact) to express how significant farmers considered each source to be of risk in terms of its potential impact on the performance of their farm. Existing risk management strategies: Simultaneous choice of risk management strategies. Econometric Model. Small scale farmers interest in hypothetical insurance: Analysis of farmers binary response (YES/NO). Econometric Model. 6
Methodology 2/2 Data type and source Primary data were exclusively collected from 362 producers in Soubré (Western Côte d Ivoire), in collaboration with ANADER Soubré (National Rural Development Support Agency). A total of fifteen (15) villages and 40 encampments from the seven (7) Sub Prefectures of the department of Soubré were surveyed. Two types of data were collected: experimental data through a number of experimental sessions or games and data set from a standard household survey. 7
Results 1/2 o o o o o Relatively high level of risk aversion among Ivorian farmers Climate variability has been ranked as one of the most important source of risks faced by farmers 3 informal risk management strategies crop diversification, precautionary savings and sharing risk within a social network are used by farmers. Positive correlation between risk management decisions Risk aversion is a strong motivation to farmers decisions of having precautionary saving and sharing risk within a social network. However, the decision of crop diversification does not depend on the farmer s degree of risk aversion Farm size, household s size, land ownership, farming experience and household s head literacy have also been found as factors that increase the likelihood of using some forms of informal risk management strategies 8
Results 2/2 Considerable interest in agricultural insurance (66%); Zone Interest in Insurance for weather risks (%) YES NO Total Zone 1 23.20 13.26 36.46 Zone 2 19.34 13.53 32.87 Zone 3 23.48 7.2 30.66 Total 66.02 33.98 100 High risk aversion has been found to inhibit the demand for agricultural insurance; Individual barriers and design problems have been identified as disincentives to farmer participation in insurance program. More importantly, lack of confidence in the insurance policy and limited trust in the credibility of the insurer inhibit insurance take up decision. 9
Conclusion and Main Recommendation Whether for policy formulation or technology adoption, the risk aversion of farmers must be taken into account. Before deciding on promoting insurance for farmers as individual policyholders, a risk layering exercise and consideration of farmers attitude vis à vis to risk is imperative. It is important to take into consideration the social and commercial objectives of insurance and the fact that they may be inconsistent. It is important to address the individual barriers and design problems that have been identified as disincentives to farmer participation in insurance program. More importantly, farmers should be convinced of the reliability and the credibility of the insurance provider. 10
THANK YOU 11