Abstract
This paper investigates the relationship between livelihood diversification strategies and risk preferences, including risk aversion, loss aversion, and higher-order risk preferences of farmers from West Bengal, India, using multivariate regression (mvreg) and multivariate probit (mvp) models. We use data from lottery choice experiments and household surveys to estimate higher-order risk preferences and analyse the relationship between risk preferences and livelihood diversification (N = 191). We found that many sampled households take up other supplementary income-generating activities besides agriculture and allied activities to spread their risk. Farmers who are risk averse are more likely to receive income from remittances and entrepreneurial activities. Higher prudence is linked with higher income contribution from agricultural activities, but a lower income contribution from migration-related activities and non-migratory casual labour. Temperate individuals are more likely to generate a higher share of income from agriculture-related activities and non-migratory casual labour, but a lower share from remittances. Higher-order risk preferences—prudence and temperance—affect livelihood diversification significantly.
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Notes
Kimball (1990) coined the term prudence to explain precautionary savings by individuals when faced in a risky situation. That is, prudent individuals tend to save more and consume less when there is more background risk or uncertainty about future income, and these individuals save more at higher income levels than when their income is low. In the expected utility framework, prudence is a positive third-order derivative of the utility function. The expected marginal utility of saving rises with a rise in background risks (Noussair et al. 2014), whereas Kimball (1992) referred to ‘temperance’ as the negative fourth-order derivative (or equivalently concave second derivatives) of the utility function. A temperate individual would prefer two independent risks to be spread across various periods than have both occurring at the same time. Temperate individuals prefer a less risky investment in the presence of background risk as they tend to be more risk averse in the presence of higher background risk.
Landholders with less than 2.5 acres are categorized as marginal landholders. Small landholders are those with more than 2.5 acres and less than 5 acres. Landholders with more than five acres are categorized as large landholders.
Minimum drought survival capability is calculated as the number of months that a household could survive in a drought-like situation with only their existing income.
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Acknowledgements
Kanchan Joshi would like to thank the Australian Government for providing her with the “Australian Government Research Training Program Scholarship”. Kanchan Joshi would also like to thank the Institute of Economic Growth (IEG), New Delhi, for all the support she got during her stay to design the experiment. The authors are grateful for the generous financial support from the Department of Environmental Sciences, Macquarie University, and partial funding from the Australian Centre for International Agricultural Research. We thank Dr Ram Ranjan for his initial support and engagement. We thank the Bolpur Manab Jamin team for their logistical support during the fieldwork. We thank all the farmers who voluntarily consented to participate in the experiments and surveys. This research would not have been possible without their generous time and engagement.
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We are grateful for the generous financial support for PhD research from the Department of Environmental Sciences, Macquarie University, and partial funding from the Australian Centre for International Agricultural Research.
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KJ performed conceptualization, designed methodology, created models, conducted data analysis, and wrote the original draft. TR provided guidance in conceptualization, methodology design and implementation, reviewed statistical analysis, and edited the manuscript.
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Joshi, K., Ranganathan, T. Higher-order risk preferences and livelihood choices of farmers from West Bengal, India. J. Soc. Econ. Dev. (2023). https://doi.org/10.1007/s40847-023-00292-7
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DOI: https://doi.org/10.1007/s40847-023-00292-7