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Modeling heterogeneous risk preferences

Zhengfei Guan (Department of Food and Resource Economics, Gulf Coast Research and Education Center, University of Florida , Wimauma, Florida, USA)
Feng Wu (Gulf Coast Research and Education Center, University of Florida , Wimauma, Florida, USA)

Agricultural Finance Review

ISSN: 0002-1466

Article publication date: 3 July 2017

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Abstract

Purpose

The purpose of this paper is to propose a general framework for modeling heterogeneous risk preferences of agricultural producers and identifying the underlying factors that affect risk preferences.

Design/methodology/approach

This paper nests the risk preference function in a general production decision framework to test and model producers’ risk preferences. The framework allows for both production and price risk, and accommodates potential inefficient behavior. Panel data and the GMM method are used in the empirical estimation.

Findings

The results in this study confirmed the hypothesis of heterogeneous risk preferences. Farmers are found to have decreasing absolute risk aversion. Both farmer characteristics and socioeconomic factors have significant impact on producers’ risk preferences. The results suggest that ignoring heterogeneity in risk preferences across individuals and how non-wealth variables could affect farmers’ risk preferences could result in biased economic behavior analysis.

Originality/value

It is generally assumed in the literature that risk preferences are homogeneous among farmers at given wealth. This is a strong assumption and there are abundant evidences that suggest otherwise. This paper makes contributions to the literature by proposing an approach to modeling heterogeneous risk preferences and identifying the factors that affect preferences.

Keywords

Acknowledgements

The authors gratefully acknowledge the Dutch Agricultural Economics Research Institute (LEI) for providing data used in this study.

Citation

Guan, Z. and Wu, F. (2017), "Modeling heterogeneous risk preferences", Agricultural Finance Review, Vol. 77 No. 2, pp. 324-336. https://doi.org/10.1108/AFR-03-2015-0016

Publisher

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Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited