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The Impact Of Risk Aversion, Time Preference, And Intertemporal Substitutability On Farmers' Risk Management Behavior

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  • Du, Wen
  • Wang, H. Holly

Abstract

This paper applies the generalized expected utility (GEU) approach developed by Epstein and Zin (1989, 1991) to dynamic agricultural risk analysis. We explore the impacts of alternative preference parameters of farmers including of risk aversion, time preference, and intertemporal substitutability on their optimal risk management portfolio selection. Furthermore, we extend the GEU model by introducing a welfare measure, the equivalence variation, and investigate the impacts of U.S. government programs and market institutions on farmers' risk management decisions. We find farmers' optimal hedge ratio is sensitive to changes in the preferences and the effects of these preferences changes are intertwined. The policy impact analysis shows government payment programs has a greater effect on farmers' optimal choice than crop insurance and crop insurance outperforms hedging. Both crop insurance and government payments are influential to farmers' welfare improvement.

Suggested Citation

  • Du, Wen & Wang, H. Holly, 2004. "The Impact Of Risk Aversion, Time Preference, And Intertemporal Substitutability On Farmers' Risk Management Behavior," 2004 Annual Meeting, June 30-July 2, 2004, Honolulu, Hawaii 36235, Western Agricultural Economics Association.
    • Handle: RePEc:ags:waeaho:36235
    DOI: 10.22004/ag.econ.36235
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    Cited by:

    1. Magreta, Ruth & Magombo, Tennyson & Zingore, Shamie, 2010. "When the Weak Win: Role of Farmer Groups in Influencing Agricultural Policy Outcome; a Case of Nkhate Irrigation Scheme in Malawi," 2010 AAAE Third Conference/AEASA 48th Conference, September 19-23, 2010, Cape Town, South Africa 97043, African Association of Agricultural Economists (AAAE).

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    Keywords

    Risk and Uncertainty;

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