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Rice and Risk: Econometric Estimation of Producers' Risk Attitudes in Flood Prone Environment of Bangladesh

S. M. Fakhrul Islam
Associate professor, Department of Agricultural Economics, Bangabandhu Sheikh Mujibur Rahman Agricultural University, Salna, Gazipur, Bangladesh

Prabhu L. Pingali
Director, Economic Program, CIMMYT, Mexico.

Abstract/ Executive Summary:

Present study developed a methodology to estimate risk attitudes of the producers operating under production risk. It analyzed risk aversion coefficients of the rice producers in flood prone environment of Bangladesh through econometric estimation of risk attitude distribution parameters incorporating the effect of subjective adjustment of human capital in the model. For this purpose, Generalized Method of Moment approximation of profit function was used to account for the stochastic technology with no restriction on preference structure. The results show that the population is characterized by Arrow-Pratt and downside risk aversion. The farmers were found to be moderately risk averse as indicated by smaller values of Arrow-Pratt risk aversion coefficients and relative risk premium.

Keywords: Rice, Risk, Econometric Estimation, Risk Attitudes, Flood Prone, Bangladesh

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End Date:

Program Area: Socio-economic and Policy

Non-commodity: Risk

Objectives:

The purpose of this paper is to analyze producers' risk attitudes using a generalized method of moment approximation of profit function and incorporating the effect of subjective adjustment of human capital. The empirical model was applied to measure risk attitudes of rice producers in flood prone risky production environment in Bangladesh.

Methodology:

This study included the following topics and sub-topics: 1. INTRODUCTION, 2. THE RISK ATTITUDES ESTIMATION MODEL,

Source of Information: Bangladesh J. Agric. Econs. XXII, 1(1999): 1-16

Article Link (Online Journal):

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Achievement/Findings:

The present study could contribute to the economic theory, in that it proposes an improved methodology of producers' risk attitudes estimation using iii: formation on their actual investment behavior rather than using a hypothetical gambling. It added evidence to the existing economic thoughts that risk attitude estimation of the producers without subjective adjustment of human capital would result inappropriate biased estimates. In order to estimate farmers' risk attitudes behavior it is necessary to consider the effect of subjective adjustment of human capital. The estimates of farmers' risk attitudes behavior given here support the conclusion that human capital variables can act as catalyst to adjust risk aversion effect to more realistic levels due to correcting an upward bias in the farmer's estimate of probability of random events of yield reduction by flood. This objective was achieved by using Generalized Method of Moment based approximation of revenue distribution function with incorporation of human capital variable.

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