To Risk or Not to Risk? Risk Management and Farm Productivity

The impact of risk management on farm productivity is still being debated. Using survey data from French and Hungarian farms, we estimate the impacts of different risk management strategies and portfolios under varying levels of risk on total factor productivity. Results from a multinomial endogenous switching regression model show that the impacts can be positive or negative, depending on the risk management strategies adopted, the structure of the farming system, and the probability of risks. The choice of risk management strategies influences the farm’s production costs and the allocation of resources. More complex risk management portfolios tend to have larger negative productivity impacts due to higher costs and the larger amount of resources subtracted from the production activity. Our results have important implications for risk management policies.