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Environmental and Resource Economics

, Volume 53, Issue 4, pp 483–505 | Cite as

Risk Preferences and Environmental Uncertainty: Implications for Crop Diversification Decisions in Ethiopia

  • Mintewab BezabihEmail author
  • Mare Sarr
Article

Abstract

To the extent that diversifying income portfolio is used as a strategy for shielding against production risk, both individual risk aversion and weather uncertainty could affect crop diversification decisions. This paper is concerned with empirically assessing the effects of risk aversion and rainfall variability on farm level diversity. Unique panel data from Ethiopia consisting of experimentally generated risk aversion measures combined with rainfall data are employed in the analysis. The major contribution of this study is its explicit treatment of individual risk preferences in the decision to diversify, simultaneously controlling for environmental risk in the form of rainfall variability. Covariate shocks from rainfall variability are found to positively contribute to an increased level of diversity with individual risk aversion having a positive but less significant role. We find that rainfall variability in spring has a greater effect than rainfall variability summer—the major rainy season. This finding is in line with similar agronomic-meteorological studies. These results imply that in situ biodiversity conservation could be effective in areas with high rainfall variability. However, reduction in risk aversion, which is associated with poverty reduction, is likely to reduce in situ conservation.

Keywords

Crop diversity Experimental risk preferences Rainfall Uncertainty 

JEL Classification

Q57 Q56 C33 C35 

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Copyright information

© Springer Science+Business Media B.V. 2012

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of SussexFalmer, BrightonUK
  2. 2.School of EconomicsUniversity of Cape TownRondeboschSouth Africa

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