Risk, Risk Aversion, and Agricultural Technology Adoption ─ A Novel Valuation Method Based on Real Options and Inverse Stochastic Dominance

Abstract

Risk and risk preferences belong to the key determinants of investment-based technology adoption in agriculture. We develop and apply a novel approach in which an inverse second order stochastic dominance approach is integrated into a stochastic dynamic farm-level model to quantify the effect of both risk and risk aversion on the timing and scale of agricultural technology adoption. Our illustrative example on short rotation coppice adoption shows that risk aversion leads to technology adoption that takes place earlier, but to a smaller extent. In contrast, higher levels of risk exposure lead to postponed but overall larger adoption. These effects would be obscured if technology adoption is not analyzed in a farm-scale context or considered as a now-or-never decision ⸺ the still dominant approach in the literature.

Farmers' risk preferences in 11 European farming systems: A multi‐country replication of Bocquého et al. (2014)

“…Ex‐ante evaluations are set up to predict the expected uptake of such voluntary measures. This requires that behavioral drivers of far‐reaching economic decisions or technology adoption, including risk and loss aversion, are better anticipated (Dessart et al, 2019; Spiegel et al, 2021). This type of ex‐ante information can help to fine‐tune policies so as to obtain the desired level of participation or to optimize the outcome for a given budget.…”

Does simultaneous adoption of drought‐tolerant maize varieties and organic fertiliser affect productivity and welfare outcomes? Evidence from rural Nigeria

“…Farmers' willingness to take risks may influence their decision to adopt agricultural innovations (Spiegel et al., 2018). From our result, the parameter estimates show that the adoption of D 1 M 0 (DTMVs only) is higher for farmers who are willing to take risks of adopting newly improved maize varieties.…”

Short supply chains and the adoption of fungus‐resistant grapevine varieties

“…Especially relevant in the context of fungus-resistant varieties is the long-term nature of the investment, that is, the lifetime of a plant is at least 20-30 years, and the associated uncertainties. The large uncertainty about future costs and benefits arising from the use of fungus-resistant varieties due to uncertainty about long-term development of production properties, policies, and especially the marketing potential is assumed to make adoption decisions, ceteris paribus, less attractive (see Spiegel, Britz, & Finger, 2021).…”

“…Furthermore, subjective risk perceptions and producers' risk attitudes are also expected to be relevant, especially for long-term investments (e.g., Spiegel et al, 2021). More risky production systems (e.g., uncertainty of yield or profit) are less likely adopted, especially by more risk averse producers.…”