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on Utility Models and Prospect Theory |
| By: | Berger, Loic; Bosetti, Valentina |
| Abstract: | The results of an experiment extending Ellsberg's setup demonstrate that attitudes towards ambiguity and compound uncertainty are closely related. However, this association is much stronger when the second layer of uncertainty is subjective than when it is objective. Provided that the compound probabilities are simple enough, we find that most subjects, consisting of both students and policy makers, (1) reduce compound objective probabilities, (2) do not reduce compound subjective probabilities, and (3) are ambiguity non-neutral. By decomposing ambiguity into risk and model uncertainty, and jointly eliciting the attitudes individuals manifest towards these two types of uncertainty, we characterize individuals' degree of ambiguity aversion. Our data provides evidence of decreasing absolute ambiguity aversion and constant relative ambiguity aversion. |
| Keywords: | Ambiguity Aversion, Model Uncertainty, Reduction of Compound Lotteries, Non-expected Utility, Subjective Probabilities, Decreasing Absolute Ambiguity Aversion, Risk and Uncertainty, D81, |
| Date: | 2016–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:ags:feemmi:236239&r=upt |
| By: | Ahsanuzzaman; George, Norton |
| Abstract: | The literature discusses risk aversion as one of the behavioral determinants of technology adoption. However, little attention has been paid to measuring ambiguity aversion of poor people in developing countries or in finding the role of ambiguity aversion in technology adoption. Risk experiments in the previous studies have been designed in such a way that individuals face the risky and/or ambiguous situations alone. Individuals in the real world, especially farmers in developing countries, are likely to get information from peers before making any decision regarding a new innovation that has an ambiguous nature. This paper addresses two broad issues. The first issue is to measure the risk and ambiguity preferences of Bangladeshi rural farmers. The paper investigates whether the attitudes toward uncertainty (risk and ambiguity) differ when farmers face the uncertainty alone versus when they are allowed to communicate with peer groups of 3 or 6. It also investigates whether farmers’ demographic characteristics affect their attitudes toward uncertainty or not. A second issue is to find whether measures of attitudes toward uncertainty is same across different groups of subjects using experimental lotteries. To do so, this paper replicates the same experiments with groups of students in two universities in Bangladesh. Finally, the paper also investigates whether demographic variables affect the attitudes toward risk and ambiguity aversion or not. It finds that risk attitudes of farmers and students are same when deciding alone. However, farmers tend to show higher variation in risk aversion than students sample when deciding in a group of 3. In the latter case, farmers tend to show less risk aversion than students. While disaggregating the measured risk attitudes across gender, female students tend to show more risk aversion as well as higher variation in risk aversion than male students in the sample. The study also finds that The study also finds that students’ and farmers’ demographic characteristics affect both risk and ambiguity aversion. |
| Keywords: | Ellsberg paradox, uncertainty, risk, ambiguity, technology adoption, expected utility theory, prospect theory, experimental economics, social exchange., Institutional and Behavioral Economics, International Development, Research and Development/Tech Change/Emerging Technologies, Risk and Uncertainty, C91, C92, C93, D81, O13, O33, Q16, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:235876&r=upt |
| By: | Bauermeister, Golo; Musshoff, Oliver |
| Abstract: | In the past decade, many studies measured individual risk attitude with different elicitation methods in a within-subject design and found significant disparity across the elicitation methods. According to the existing literature, there are also differences in the observed understanding of the elicitation methods measured by the inconsistency rate. However, there are no studies that compare the inconsistency rate across different elicitation methods in a within-subject design. Therefore, we intrapersonally compare the inconsistency rate and the risk attitude of German agricultural students in two different lottery tasks: the lottery task by Holt and Laury (2002) as well as the one by Brick, Visser and Burns (2012). Moreover, we analyze in a between-subject design whether the visualization of a lottery task for a better understanding results in differences in the elicited risk attitude and can ultimately lead to the desired reduction of the inconsistency rate. Results show that the elicited risk attitudes measured by the different lottery tasks are significantly different in both display formats since the participants’ responses are more risk averse in the more complex Holt-and-Laury task. Moreover, we find that the visualization results in more risk averse responses in both lottery tasks. According to the inconsistency rate, we find that the Brick-Visser-Burns task is better understood than the Holt-and-Laury task, especially in the textual display format. Furthermore, the visual display format of the Holt-and-Laury task results in a significantly better understanding compared to the textual display format. |
| Keywords: | Between-subject design, Brick-Visser-Burns task, display formats, Holt-and-Laury task, inconsistency rate, risk attitude, within-subject design, Agribusiness, Institutional and Behavioral Economics, Risk and Uncertainty, C91 – D80 – O10, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:235348&r=upt |
| By: | Aguirregabiria, Victor; Xie, Erhao |
| Abstract: | This paper studies the identification of players'; preferences and beliefs in empirical applications of discrete choice games using experimental data. The experiment comprises a set of games with similar features (e.g., two-player coordination games) where each game has different values for the players'; monetary payoffs. Each game can be interpreted as an experimental treatment group. The researcher assigns randomly subjects to play these games and observes the outcome of the game as described by the vector of players' actions. Data from this experiment can be described in terms of the empirical distribution of players' actions conditional on the treatment group. The researcher is interested in the nonparametric identification of players' preferences (utility function of money) and players' beliefs about the expected behavior of other players, without imposing restrictions such as unbiased or rational beliefs or a particular functional form for the utility of money. We show that the hypothesis of unbiased/rational beliefs is testable and propose a test of this null hypothesis. We apply our method to two sets of experiments conducted by Goeree and Holt (2001) and Heinemann, Nagel and Ockenfels (2009). Our empirical results suggest that in the matching pennies game, a player is able to correctly predict other player's behavior. In the public good coordination game, our test can reject the null hypothesis of unbiased beliefs when the payoff of the non-cooperative action is relatively low. |
| Keywords: | Testing biased beliefs; Multiple equilibria; Strategic uncertainty; Coordination game. |
| JEL: | C57 C72 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11275&r=upt |
| By: | Makriyannis, Christos; Johnston, Robert |
| Abstract: | Discrete choice experiments often include attributes subject to outcome uncertainty (OU), defined as uncertainty regarding actual attribute levels that will occur. Most choice experiments that incorporate OU do so using scenarios that allow for only two possible outcomes distinguished by a single probability. Because few environmental phenomena are characterized by two possible outcomes, characterizing scenarios in this way requires analysts to reframe actual conditions, discretizing the underlying continuous probability density function into two intervals. The implications of this reframing for welfare estimation are almost universally unknown. This article evaluates the convergent validity of welfare estimates from a more complex and accurate treatment of OU, compared to the traditional two-outcome approach. Methods and results are illustrated using an application to coastal flood adaptation in Connecticut, USA. Results show that a higher-resolution, multiple outcome treatment of OU provides additional information on risk preferences and willingness to pay (WTP), but also suggest that multiple outcome treatments increase task complexity. These tradeoffs highlight challenges facing the valuation of outcomes subject to OU. |
| Keywords: | Discrete choice experiments, outcome uncertainty, choice scenario, generalized multinomial logit model, climate change adaptation, Environmental Economics and Policy, Risk and Uncertainty, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:235532&r=upt |
| By: | Xiaoqing Liang; Zbigniew Palmowski |
| Abstract: | In this paper, we consider the problem of maximizing the expected discounted utility of dividend payments for an insurance company that controls risk exposure by purchasing proportional reinsurance. We assume the preference of the insurer is of CRRA form. By solving the corresponding Hamilton-Jacobi-Bellman equation, we identify the value function and the corresponding optimal strategy. We also analyze the asymptotics of the value function for large initial reserves. |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1605.06849&r=upt |
| By: | Takashi Kamihigashi (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan) |
| Abstract: | This paper shows that regime-switching sunspot equilibria easily arise in a one-sector growth model with aggregate decreasing returns and arbitrarily small externalities. We construct a regime-switching sunspot equilibrium under the assumption that the utility function of consumption is linear. We also construct a stochastic optimal growth model whose optimal process turns out to be a regime-switching sunspot equilibrium of the original economy under the assumption that there is no capital externality. We illustrate our results with numerical examples. |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2016-21&r=upt |
| By: | Beatriz Muriel (Institute for Advanced Development Studies); Marcelo Gutiérrez (Institute for Advanced Development Studies) |
| Abstract: | We developed a game, in the line of experimental economics, using an expected utility framework, applied to 108 participants. Specifically, we evaluated the hypothesis that, facing uncertainty over potential employees’ skills, employers prefer a flexible labour policy rather than a protectionist one, and when the option of flexible labour contracts is not available, they choose not to undertake a business, reducing job creation. The empirical results show that 79.3% of participants prefer a flexible labour policy, as well as that when this option is excluded, some participants abstain from business undertakings - reducing job creation -, and instead become workers. |
| Keywords: | Experimental economics, risk aversion, expected utility theory, employment, labour protection, labour flexibility |
| JEL: | C91 D81 J89 |
| URL: | http://d.repec.org/n?u=RePEc:adv:wpaper:201512&r=upt |
| By: | Keita, Moussa |
| Abstract: | This manuscript provides a discussion of some key concepts of neoclassical microeconomics focusing on consumer theory. The work is organized into three chapters. In the first chapter, we conduct a broad discussion on the notion of consumer preference and its translation in terms of utility function. In this chapter, several types of utility function (defined according to the degree of substitutability of goods) are studied. These functions include the Cobb-Douglas type utility functions (weakly substitutable goods), the linear functions (perfectly substitutable goods) and Leontief type functions (complementary goods). The second chapter is devoted to the study of the consumer's budget constraint. In this chapter, several notions are presented including the concept of budget line and consumption set. We also introduce the notion of displacement of budget line and variation of consumption set as results of economic and fiscal policies changes but also as results of exogenous price changes. The third chapter is devoted to the study of consumer utility maximization behavior under her budget constraint. This behavior is presented as optimization program allowing to derive optimal demands expressed as function of prices and income. |
| Keywords: | Microeconomics, Consumer, utility functions, budget constraint, optimal demands |
| JEL: | D1 D4 D5 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:71577&r=upt |
| By: | Sandorf, Erlend Dancke; Campbell, Danny |
| Abstract: | Accumulating evidence suggests that many respondents in stated choice experiments use simplifying strategies and heuristics. Such behavior is a deviation from random utility theory and can lead to biased estimates if not appropriately considered. This paper is a first attempt to systematically explore the use of the satisficing heuristic (Simon, 1955) in the context of a stated choice experiment. We consider 944 possible satisficing rules and allow respondents to revise the rules adopted throughout the choice sequence. While only a small proportion of respondents used the same satisficing rule across the entire sequence, allowing for changes in behavior at different stages reveals evidence that the use of the heuristic follows a learning and fatigue path. Furthermore, considering respondents satisficing leads to improved model fits and different marginal willingness-to-pay estimates. |
| Keywords: | random utility maximization, satisficing, stated choice experiments., Environmental Economics and Policy, Food Consumption/Nutrition/Food Safety, Institutional and Behavioral Economics, Research Methods/ Statistical Methods, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:235905&r=upt |
| By: | Melstrom, Richard T.; Jayasekera, Deshamithra H.W. |
| Abstract: | The role of unobserved site attributes is a growing concern in recreation demand modeling. One solution in random utility models (RUM) involves separating estimation into two stages, where the RUM model is estimated with alternative-speci c constants (ASCs) in the rst stage, and the estimated ASCs are regressed on the observed site attributes in the second stage. Prior work estimates the second stage with OLS and 2SLS regression. We present an application with censored regression in the second stage. We show OLS produces inconsistent parameters when there are unvisited sites with no estimable ASCs and that censored regression avoids this problem. |
| Keywords: | Random utility model, non-market valuation, recreational shing, Research Methods/ Statistical Methods, C25, Q26, Q51, |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:236252&r=upt |
| By: | Jacob LaRiviere (Department of Economics, University of Tennessee); Mikolaj Czajkowski (Faculty of Economic Sciences, University of Warsaw); Nick Hanley (Department of Geography and Sustainable Development, University of St. Andrews); Katherine Simpson (Economics Division, University of Stirling, Scotland) |
| Abstract: | This paper reports the results of a stated preference experiment designed to test for how information provided in a survey affects knowledge, and how knowledge affects preferences for a public good. A novel experimental design allows us to elicit subjects’ ex ante knowledge levels about a good’s attributes, exogenously vary how much new objective information about these attributes we provide to subjects, elicit subjects’ valuation for the good, and elicit posterior knowledge states about the same attributes. We find evidence of incomplete learning and fatigue: as subjects are told more information, their marginal learning rates decrease. We find there is no marginal impact of knowledge on the mean nor the variance of WTP for changes in the environmental good; but that ex ante knowledge does affect stated WTP. Our results are consistent with preference formation models of confirmation bias, costly search, or timing differences in learning and preference formation. Our results raise questions about the purpose and effects of providing information in stated preference studies. |
| Keywords: | Learning, Information, Behavioral Economics, Decision Making Under Uncertainty |
| JEL: | D83 D81 Q51 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2016-12&r=upt |
| By: | Braun, Carola; Rehdanz, Katrin; Schmidt, Ulrich |
| Abstract: | Recent studies in the marketing literature developed a new method for eliciting willingness to pay (WTP) with an open-ended elicitation format: the Range-WTP method. In contrast to the traditional approach of eliciting WTP as a single value (Point-WTP), Range-WTP explicitly allows for preference uncertainty in responses. The aim of this paper is to apply Range- WTP to the domain of contingent valuation and to test for its theoretical validity and robustness in comparison to the Point-WTP. Using data from two novel large-scale surveys on the perception of solar radiation management (SRM), a little-known technique for counteracting climate change, we compare the performance of both methods in the field. In addition to the theoretical validity (i.e. the degree to which WTP values are consistent with theoretical expectations), we analyse the test-retest reliability and stability of our results over time. Our evidence suggests that the Range-WTP method clearly outperforms the Point-WTP method. |
| Keywords: | Surveys,Climate Change,Emotions,Research Validity,Chocolate,Payment,Alternative Energy,Wine |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkie:141320&r=upt |
| By: | Olivier l’Haridon (Université de Rennes); Ferdinand Vieider (Department of Economics, University of Reading) |
| Abstract: | We analyze the risk preferences of 2939 subjects across 30 countries on all continents. Using structural modeling, we explore heterogeneity in risk preferences across three dimensions: i) between individuals; ii) between prospects; and iii) between countries. Preferences in non-Western countries differ systematically from those found inWestern countries, itherto considered universal. Reference-dependence and likelihood-dependence are both found to play a role in describing preferences. While we confirm previous results on individual characteristics explaining little of overall preference heterogeneity, between countries a few macroeconomic indicators can explain a considerable part of the heterogeneity. The heterogeneity explained furthermore differs across decision parameters, being low for pure risk aversion measures, but higher for measures of noise and for rationality parameters. |
| Keywords: | risk preferences, heterogeneity |
| JEL: | C93 D03 D80 O12 |
| Date: | 2016–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2016-04&r=upt |
| By: | Nocke, Volker; Schutz, Nicolas |
| Abstract: | Applied researchers often work with demand systems that do not depend on income, with the implicit assumption that preferences are quasi-linear and income sufficiently large. The classic approach to the integrability of demand does not readily apply in this case. Adopting a much simpler approach that is based on Poincarés Lemma and duality, we provide necessary and sufficient conditions for the quasi-linear integrability of such demand systems. We also derive results on the associated utility function and its domain. |
| Keywords: | duality; integrability; quasi-linear demand |
| JEL: | D11 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11293&r=upt |
| By: | Connor, Lawson Q.; Rejesus, Roderick M.; Yorobe, Jose |
| Abstract: | Research has shown Bt technology improves mean yield and risk exposure of farmers. This paper investigates whether improvement in risk exposure from adoption of Bt and stacked trait corn has improved farmers’ desire to invest in their farm. Farmer risk perception is an important piece of this response and is modeled here in a framework that incorporates loss aversion as a function of farmer wealth. Results show that single trait Bt farmers had a significant mean yield increase while downside risk reduction was stronger for the stacked variety adopters. Stacked adopters also had greater investment response than other farmers establishing the importance of loss aversion in farming decisions. This paper adds to current research on Bt corn, other ways by which Bt technology may affect farmers and the wider economy. Particularly in developing countries where policies to encourage investment is important, this paper adds tools that help understand how to create such policies more effectively. |
| Keywords: | Bt corn, Philippines, risk, Crop Production/Industries, Farm Management, Institutional and Behavioral Economics, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:235941&r=upt |
| By: | Paul J. Healy (Department of Economics, Ohio State University); Alexander L. Brown (Department of Economics, Texas A&M University) |
| Abstract: | An essential requirement in the analysis of choice data is that its elicitation be incentive compatible: the incentives provided should not skew agents’ choices. We test incentive compatibility of the random problem selection (RPS) payment mechanism, wherein one choice is randomly chosen for payment. We find that it is not incentive compatible when all decisions are shown in a standard list format. But when the rows of the list are randomized and shown on separate screens, incentive compatibility is restored. This causes more inconsistency between choices, but, since the experiment is incentive compatible, this inconsistency must be inherent in subjects’ preferences. |
| Keywords: | Payment mechanism, experimental methodology, monotonicity, decisions under uncertainty |
| JEL: | C90 D01 D03 D81 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:osu:osuewp:16-02&r=upt |
| By: | Gill, Carrie; Atlas, Stephen; Hardisty, David |
| Keywords: | Loss aversion, temporal framing, energy efficiency, Consumer/Household Economics, Institutional and Behavioral Economics, Marketing, Resource /Energy Economics and Policy, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:236026&r=upt |
| By: | Kemper, Nathan; Nayga, Rodolfo M. Jr.; Popp, Jennie; Bazzani, Claudia |
| Abstract: | Choice experiments are now one of the most popular stated preference methods used by economists. A highly documented limitation of stated preference methods is the formation of hypothetical bias in the estimation of consumers’ willingness-to-pay (WTP) for a good or a service. Honesty oaths and consequentiality scripts are two ex ante approaches that show promise in their ability to reduce or eliminate hypothetical bias. We examine these approaches independently and together and measure their effectiveness by comparing the resulting WTP values. We also explore a potential connection between consequentiality, honesty oaths, and attribute non-attendance (ANA). We infer patterns of ANA resulting from our various treatments (i.e., consequentiality script only, honesty oath only, combined script and oath, inconsequential, and control) and examine the differences. Our results suggest that the combined ex ante approach of consequentiality script and honesty oath provided significantly lower WTP values than all other experimental treatments. Conditioning our data for both consequentiality and ANA resulted in significant improvements in model fit across all treatments. Results indicate that not accounting for ANA has important implications for welfare estimates. While we cannot fully explain the connection, the combination of the consequentiality script, honesty oath, and inferred ANA allowed us to better see the differences between respondents’ attending attributes and those ignoring. |
| Keywords: | consequentiality, honesty oath, attribute non-attendance, choice experiment, Marketing, Research Methods/ Statistical Methods, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:235381&r=upt |
| By: | Cedrini, Mario A.; Novarese, Marco |
| Abstract: | Until the advent of Behavioral and Neuroeconomics, Economics has generally tended to undervalue, on average, the importance of fear. Fear has traditionally been regarded as pertaining to an alternative domain with respect to rationality: it has thus been considered as triggering mechanism of anomalous, even irrational behavior. Conversely, the article speculates on the complexity of the concept of fear and of the social effects it is thought to produce. While discussing the eventual desirability of a freed-from-fear world and Western obsession with risk management and safety from the economic problem and other pressures, the paper provides a general introduction to the relevance of the relatively unexplored issue of fear to economics as discipline as well as to applied economics in public policy. |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:uca:ucapdv:187&r=upt |
| By: | Ahamad, Mazbahul |
| Abstract: | We develop a model of two-sided matching problem with individual-sided envious preferences that originate from an emulative envy effect in which a more desirable state that is preferred is owned by the other individual. We assume envious preferences influence an individual’s decision to enter into a two-sided network instead of being unassigned. In this paper, we show that an individual-sided envious preference leads to a stable matching under a two-sided market framework. Applying the mechanism of the model to behavioral contract theory, we show that individual-proposing envious acceptance leads to stable farmer-buyer contract matching considering buyer’s time invariant preference. We further argue that individual’s envious preference also contributes to herd-type acceptance that dominates individual’s logical preferences in participation decision under a less risky environment. |
| Keywords: | Behavioral contract design, Envious acceptance algorithm, Emulative envy effect, Envious preference, Herd-type acceptance, Market design, Network effect, Agribusiness, Agricultural and Food Policy, Industrial Organization, Institutional and Behavioral Economics, D47, D81, D86, L14, |
| Date: | 2016–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:235482&r=upt |
| By: | Holopainen, Markus; Sarlin, Peter |
| Abstract: | This paper presents first steps toward robust early-warning models. We conduct a horse race of conventional statistical methods and more recent machine learning methods. As early-warning models based upon one approach are oftentimes built in isolation of other methods, the exercise is of high relevance for assessing the relative performance of a wide variety of methods. Further, we test various ensemble approaches to aggregating the information products of the built early-warning models, providing a more robust basis for measuring country-level vulnerabilities. Finally, we provide approaches to estimating model uncertainty in early-warning exercises, particularly model performance uncertainty and model output uncertainty. The approaches put forward in this paper are shown with Europe as a playground. |
| Keywords: | financial stability, early-warning models, horse race, ensembles, model uncertainty |
| JEL: | E44 F30 G01 G15 C43 |
| Date: | 2015–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2015_006&r=upt |
| By: | Fatiha Bennia (Aix-Marseille University, Laboratoire de Santé Publique, Faculté de Médecine); Nicolas Gravel (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS) |
| Abstract: | In this paper, we appraise the recent evolution of the distribution of individuals’ risk of cardiovascular diseases (CVD) in France among both men and women using new normative criteria. An individual risk of CVD is described by a probability of getting such a disease. Building on the framework of Gravel and Tarroux (2015), we assume that individuals, who differ by their income, have Von Neuman-Morgenstern (VNM) preferences over such risks. We appeal to Harsanyi’s aggregation theorem to provide empirically implementable dominance criteria that coincide with the unanimity, taken over a large class of such individual preferences, of anonymous and Pareto-inclusive VNM social rankings of distributions of individuals’ risk of CVD. The implementable criteria that we obtain are Sequential headcount poverty dominance and Sequential headcount affluence dominance. We apply these criteria to the distribution of cardiovascular risks among French men and women on the 2006-2010 period. Probabilities of CVD are assigned to individuals on the basis of a logit model estimated on both the men and the women samples for each of the two years. Our main empirical result is that men and women were differently affected by evolution in the distribution of CVD risks between 2006 and 2010. Specifically, the distribution improved for women but did not improve for men. |
| Keywords: | Risk, Dominance, ex ante Social Welfare, State-Dependent Expected Utility, Poverty, Health, Cardiovascular diseases |
| JEL: | C81 D3 D63 D81 I32 J63 J64 |
| Date: | 2016–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1619&r=upt |
| By: | Bro, Aniseh S.; Ortega, David; Clay, Daniel |
| Abstract: | Coffee has long been known as a commodity product with a large “footprint” in poor, often mountainous countries in the tropics, and as a leading source of economic growth for many of them. On a global scale it is recognized as the second most traded commodity, after oil (Ponte, 2002). Today, the suitability of the coffee growing regions is compromised due to the impacts of climate change and exacerbated due to the intensification of agricultural practices, which is a result of higher global demand for coffee and increasingly competitive markets. In Latin America, coffee is the main source of income for more than 1 million farmers. Nicaragua alone has 48,000 farmers, 80% of which are small-scale coffee producers (Valkila, 2009). Additionally, Nicaragua is one of the countries in Mesoamerica that will be the hardest hit by the impacts of climate change, and all eyes are drawn to the Matagalpa coffee-growing region where the challenges facing coffee producers are known to be especially daunting (Laderach et al., 2011). How farmers there will respond to a potential 40-60% loss of agro-climatic suitability driven by a predicted 2.2ºC temperature increase and a 130mm decline in precipitation by 2050 (Ovalle-Rivera et al., 2015) is the focus of much consternation and debate among industry, policy and scientific circles (Ovalle-Rivera et al., 2015; Baca et al., 2014; Laderach et al., 2013) In light of the potentially devastating impacts of climate change in Nicaragua’s coffee sector, understanding the incentives of farmers to adopt new production and processing technologies that will help them build adaptive capacity to these impacts is crucial to their future sustainability. Institutions need this knowledge if they wish to allocate their resources efficiently while ensuring rapid uptake of the new technologies (Marshall et al., 1997). The purpose of this study, therefore, is to examine farmers’ preferences for different coffee production strategies and to explore the heterogeneity of these preferences using primary data from Matagalpa, Nicaragua. The results will be used to analyze how the coffee sector in Nicaragua can build adaptive capacity to climate change. We hypothesize that farmers who belong to cooperatives are likely to make significantly different coffee production decisions than those who do not. The empirical methodology of this study is based on experimental choice modeling methods to analyze farmers’ preferences for different coffee production strategies among a series of alternatives. Choice experiments require respondents to state their choice over set of alternatives. These alternatives are described by different attributes and responses are used to infer the value of each attribute. The theoretical background of choice experiments is based on random utility theory, and relies on the assumptions of economic rationality and Lancastrian utility maximization. In other words, by stating a preference, individuals are assumed to have chosen the alternative that will yield the highest utility to them. In our choice experiments, the alternatives that farmers were presented with comprised of varying levels of key attributes that were identified as important characteristics that influence a farmer’s decision to produce and invest in coffee. These attributes are: price of coffee cherry (4 price levels expressed in percentages), access to inputs through subsidies (no input subsidies, subsidies for pesticides only, subsidies for fertilizers only, and subsidies for both fertilizers and pesticides), access to extension services (yes/no), labor requirements (high/low), coffee variety richness (one variety, two varieties), and crop species richness (sole coffee, coffee plus 1 crop, coffee plus 2 crops, coffee plus 3 crops). Farmers had the option of opting out of the choices presented to them and produce in the same way as they usually produce. The data used in this study are derived from 237 household surveys conducted in the department of Matagalpa between June and July 2015. Households were selected using a two stage stratified random selection strategy. The stratification was based on level of vulnerability to climate change. Household and farm specific information was collected through these surveys and used in conjunction with the choice experiment data. These data included: demographic and socio-economic information, coffee production practices, cooperative membership information, and experiences with negative shocks, such as floods, droughts, and other climatic events. Preliminary results from a random parameters model show that coffee producers value subsidized access to fertilizers only and to fertilizers and pesticides together to an equivalent of 8.1% and 25.1% of their total income from coffee, respectively, and that they value access to on-farm extension services to an equivalent of 12.5% of their total income from coffee. These producers, however, would have to receive a premium equivalent to 16% of their total income from coffee in order to accept subsidized pesticides, this is likely a reflection of the recently devastating effect of the leaf rust disease in coffee in Central America, and the inadequate response that farmers received from institutions, in the form of pesticides, to combat the pest. Finally, farmers would have to receive a premium equivalent to 4.2% of their total income from coffee in order to diversify their coffee plantations with other crops (or equivalently, an average of 3,714.72 Nicaraguan Córdobas). The livelihoods of hundreds of thousands of coffee producers around the world are at risk due to the threat of climate change on the suitability of coffee producing regions. This study provides important insights on how coffee producers in Nicaragua value key attributes related to coffee production which enables us to make recommendations on possible policy paths that can help farmers transition to practices that will help them build adaptive capacity to these changes. References Baca, María, Peter Läderach, Jeremy Haggar, Götz Schroth, and Oriana Ovalle. "An integrated framework for assessing vulnerability to climate change and developing adaptation strategies for coffee growing families in Mesoamerica." PloS one 9, no. 2 (2014): e88463. Laderach, Peter, Mark Lundy, Andy Jarvis, Julian Ramirez, Emiliano Perez Portilla, Kathleen Schepp, and Anton Eitzinger. "Predicted impact of climate change on coffee supply chains." In The Economic, Social and Political Elements of Climate Change, pp. 703-723. Springer Berlin Heidelberg, 2011. Ovalle-Rivera, Oriana, Peter Läderach, Christian Bunn, Michael Obersteiner, and Götz Schroth. "Projected Shifts in Coffea arabica Suitability among Major Global Producing Regions Due to Climate Change." (2015): e0124155. |
| Keywords: | climate change, sustainability, coffee, choice experiments, Community/Rural/Urban Development, International Development, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:235729&r=upt |