The impact of risk on inequality: evidence from the Irish agricultural sector

The goal of the present paper is to test the hypothesis that risk has an impact on inequality. Many studies investigating the behaviour of farmers under risk have concluded that poorer farmers tend to reduce their risk by reducing proportionally more their expected gross margin than the wealthier ones because they are more risk averse and less protected against risk. This would be the driving force behind the distributional impact of risk. Here we propose a direct way to test this hypothesis by decomposing income inequality in its different sources in order to understand the importance of risk compared to other factor in explaining inequality. We applied the method to a dataset of repeated cross-sectional data on the Irish agriculture and we found that risk explains up to 20% of inequality once other factors are controlled for. Furthermore, we have seen that this impact has risen over time but that this increase could be stopped by mitigating the impact of risk on farmers with proper risk management tools. Lastly, we observe that this rise coincides with the rise in market risk linked to lowering of price support implemented under the reforms of pillar I of the Common Agricultural Policy (CAP). It is therefore likely that the distributional impact of risk is going to be high over the next decade because the planned lowering of market supports under the next reform of the CAP.