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Farm-Level Risk-Balancing Behavior and the Role of Latent Heterogeneity

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  • Aderajew, Tamirat S.
  • Du, Xiaoxue
  • Pennings, Joost M. E.
  • Trujillo-Barrera, Andres

Abstract

The risk-balancing hypothesis (RBH) suggests that farms will take less business risk as their financial risk increases, but existing literature provides empirical evidence that the RBH might be invalid under certain circumstances. We present a unified model that explains the conditions under which the RBH holds or is invalidated by recognizing the role of latent heterogeneity among farms. We generalize the RBH idea and trace the source of credit risk back to latent heterogeneity among farms. We then apply recent literature to longitudinal data from a panel of Dutch farms and classify segments using a finite mixture regression fixed-effects model and find that the RBH may not apply to all groups in the same way.

Suggested Citation

  • Aderajew, Tamirat S. & Du, Xiaoxue & Pennings, Joost M. E. & Trujillo-Barrera, Andres, 2020. "Farm-Level Risk-Balancing Behavior and the Role of Latent Heterogeneity," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 45(2), March.
    • Handle: RePEc:ags:jlaare:302454
    DOI: 10.22004/ag.econ.302454
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    Cited by:

    1. Adhikari, Sudip & Khanal, Aditya R., 2020. "Does higher business risk influence financial risk and induce savings among small agricultural operations? Findings from Tennessee," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304509, Agricultural and Applied Economics Association.
    2. Xiaoxue Du & Hernan Tejeda & Zhengliang Yang & Liang Lu, 2022. "A General-Equilibrium Model of Labor-Saving Technology Adoption: Theory and Evidences from Robotic Milking Systems in Idaho," Sustainability, MDPI, vol. 14(13), pages 1-17, June.
    3. Zhengliang Yang & Xiaoxue Du & Liang Lu & Hernan Tejeda, 2022. "Price and Volatility Transmissions among Natural Gas, Fertilizer, and Corn Markets: A Revisit," JRFM, MDPI, vol. 15(2), pages 1-14, February.
    4. Tejeda, Hernan A. & Chahine, Mireille & Du, Xiaoxue & Lu, Liang & Westerhold, Ashlee, 2020. "Investigating Factors Affecting Adoption of Automated Milking Systems (AMS) in Idaho," Western Economics Forum, Western Agricultural Economics Association, vol. 18(2), December.

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