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Title:Effect of Risk and Risk Aversion on Farm Decision-Making: Farmers in Northern Thailand
Author(s):Grisley, William
Department / Program:Agricultural Economics
Discipline:Agricultural Economics
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):Economics, Agricultural
Abstract:The purpose of this study was to determine the impact that farm decision makers' expectations of uncertain events in crop production and their preferences for taking risks had on the farm decision-making process. Individual firm data from a random sample of thirty-nine farmers in two villages in the Chiang Mai Valley of northern Thailand were used.
A procedure from which a decision-makers' preferences for taking risks was developed that included real monetary payoffs. The hypothesis of partial absolute risk aversion was tested and the Pratt-Arrow measure of absolute risk aversion using, first, an exponential utility function, and secondly, a quadratic utility function was quantified for each decision maker. Decision-makers' expectations regarding the outcomes of the uncertain events price, yield, and net income of the frequently produced crops were elicited. The procedure used for elicition included a monetary (betting) incentive to insure that the subjects would take the process seriously.
A theoretical model was developed to show that a risk averse decision maker facing an uncertain output price and input-output relationship would produce a lower level of output than the risk neutral decision maker that is indifferent to price and yield variability. The model was extended to show, first, that an increase in risk resulted in a decrease in the equilibrium level of output, and secondly, that an increase in risk would have the same results.
A multiple regression analysis was used to test the hypothesis of increasing partial absolute risk aversion. It was found that the farmers in both villages were increasingly risk averse.
Decision-makers' expectations were analyzed both on an individual and average basis. In both villages for the traditional rice crop it was found that farmers were able to form expectations that were not significantly different from the actual results. These results, however, were not found to be true for the crops of tobacco, soybeans, and peanuts.
The coefficients of variation was used to determine where decision makers perceived the most significant sources of risks to originate from. For the traditional rice crops, price and yield risks were of equal magnitude in one village, while price risks were greater than yield risks in the other. Price risks were of a greater magnitude for the crop of peanuts, while yield risks were larger for the soybean crop.
The technique of stochastic dominance was used to determine whether decision makers arrived at production plans that reflected their expectations. It was found that more cash inputs and/or a larger area of land was planted to the dominating crop.
A multiple regression model was used to determine, first, the effect that the anticipated level of inputs had on measures of the expectations distribution of yield, and secondly, the effect that yield and price expectations and risk preferences had on the anticipated demand for inputs, In general, the anticipated application of inputs did not have a significant effect on the measures of the expected yield distribution. Yield and price expectations did, however, have a significant effect on the demand for inputs. Decision-makers' risk preferences were not significant.
Issue Date:1980
Description:258 p.
Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 1980.
Other Identifier(s):(UMI)AAI8026504
Date Available in IDEALS:2014-12-13
Date Deposited:1980

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