Risk aversion in low income countries: Experimental evidence from Ethiopia

"Production systems in low-income developing countries are generally poorly diversified, focusing on rainfed staple crop production and raising livestock. These activities are inherently risky and investment and production decisions by farm households are therefore made within environments that are affected by risk. Because of poorly developed or absent credit and insurance markets it is difficult to pass any of these risks to a third party. As a result, it is often found that even when the expected net return is high, households are reluctant to adopt new agricultural technologies when they involve risk. Better understanding risk behavior will be essential for identifying appropriate farm-level strategies for adaptation to climate change by low-income farmers. Despite risk's potentially central role in farm investment decisions, there have been few attempts to estimate the magnitude and nature of risk aversion of farm households in low-income developing countries. To partially close this gap, this paper uses an experimental approach applied to 262 households in the Ethiopian highlands with real payoffs. By incorporating both small and large stakes and gains and losses into the experiment, we test for the presence of low stake risk aversion and loss aversion. We find that more than 50 percent of the households are severely or extremely risk averse. This contrasts with studies in Asia where most household decision-makers exhibit moderate to intermediate risk aversion. We find that households that stand to lose as well as gain something from participation in games are significantly more risk averse than households playing gains-only games. This strongly suggests that agricultural extension efforts involving losses as well as gains may face systematic resistance by farmers in low-income, high-risk environments. Promotion of technologies with downside risks – even if the upside potential is enormous – should therefore be combined with insurance or other support. We also find that even without the possibility of losses households are much more averse to risk when stakes are high. Results indicate that insurance or other support can likely be phased out. After initial successes have convinced farmers that technologies are viable, risk aversion declines. There are also significant differences in risk averting behavior between relatively poorer and wealthier farm households, which is consistent with decreasing absolute risk aversion. This suggests that as wealth is built up households are willing to take on more risk in exchange for higher returns. Both these findings suggest a strong path dependence. Efforts to develop poor rural areas through promotion of risky technologies should take this path dependence into account. Early successes are important, but households should also be allowed to build up wealth before they are challenged or tempted to take on more risky ventures. Furthermore, the finding that even without the possibility of losses households are much more risk averse when stakes are higher, suggests that agricultural extension should start modestly before asking households to take on larger gambles." from Authors' Abstractexperimental studies, loss aversion, risk aversion, Risk management, econometric models, Farm households,

Corporate Environmental Management in Transition Economies: The Case of Central and Eastern Europe

The authors study the adoption of environmental management practices in the most polluting industrial sectors in Bulgaria, Hungary, Lithuania, Poland, Romania and Slovakia during the first years of transition from central planning to market economies. Despite the stickiness of long established managerial regimes, 51% of the firms in our sample adopted environmental plans and/or established environmental departments in the 1990–1998 period. The authors´ bivariate analysis reveals that some of the most important forces behind adoption are environmental enforcement, export orientation and public disclosure of firm environmental performance.environmental management, bivariate analysis, Central and Eastern Europe

Impact of soil conservation on crop production in the Northern Ethiopian Highlands:

"Land degradation, in the form of soil erosion and nutrient depletion, threatens food security and the sustainability of agricultural production in many developing countries. Governments and development agencies have invested substantial resources in promoting soil conservation practices, in an effort to improve environmental conditions and reduce poverty. However, very limited rigorous empirical work has examined the economics of adopting soil conservation technology. This paper investigates the impact of stone bunds on crop production value per hectare in low and high rainfall areas of the Ethiopian highlands using cross-sectional data from more than 900 households having multiple plots per household. We use modified random effects models, stochastic dominance analysis (SDA) and matching methods to ensure robustness. The parametric regression and SDA estimates are based on matched observations obtained from nearest neighbor matching using propensity score estimates. This is important because conventional regression and SDA estimates are obtained without ensuring the existence of comparable conserved and non-conserved plots within the distribution of covariates. Here, we use matching methods, random effects and Mundlak's approach to control for selection and endogeneity biases that may arise due to correlation of unobserved heterogeneity and observed explanatory variables. The three methods used herein consistently show that plots with stone bunds are more productive than those without such technologies in semi-arid areas but not in higher rainfall areas, apparently because the moisture-conserving benefits of this technology are more beneficial in drier areas. This implies that the performance of stone bunds varies by agro-ecological type, suggesting a need for the design and implementation of appropriate site-specific technologies." from Authors' AbstractSoil conservation, Crop production, Agro-ecology, Matching method, Stochastic dominance, Modified random effects model, Land management,

Risk aversion in low-income countries: Experimental evidence from Ethiopia

"Agricultural production remains the main source of livelihood for rural communities in Sub-Saharan Africa, providing employment to more than 60 percent of the population and contributing about 30 percent of gross domestic product. With likely long-term changes in rainfall patterns and shifting temperature zones, climate change is expected to significantly affect agricultural production, which could be detrimental to the region's food security and economic growth. An assessment of the factors influencing farm-level adaptation can facilitate the formation of policies and investment strategies that help moderate potential adverse consequences of long-term climate change. Because smallholder farmers tend to have a low capacity to adapt to changes in climatic conditions, policies that help these farmers adapt to global warming and associated climatic extremes are particularly important. This brief is based on a study that assesses smallholder farmers' adaptation to climate change in southern Africa. The study identifies farmers' perceptions of climate change and the determinants of farm-level adaptation strategies, and recommends policies that could help stabilize national and regional food production given the anticipated adverse effects of climate change." from textRisk aversion, farm-level adaptation strategies, Small farmers, Food and water security, Climate change,

Cooperative Behavior and Common Pool Resources: Experimental Evidence from Community Forest User Groups in Nepal

This paper examines whether cooperative behavior by respondents measured as contributions in a one-shot public goods game correlates with reported pro-forest collective action behaviors. All the outcomes analyzed are costly in terms of time, land, or money. The study finds significant evidence that more cooperative individuals (or those who believe their group members will cooperate) engage in collective action behaviors that support common forests, once the analysis is adjusted for demographic factors, wealth, and location. Those who contribute more in the public goods experiment are found to be more likely to have planted trees in community forests during the previous month and to have invested in biogas. They also have planted more trees on their own farms and spent more time monitoring community forests. As cooperation appears to be highly conditional on beliefs about others’ cooperation, these results suggest that policies to support cooperation and strengthen local governance could be important for collective action and economic outcomes associated with forest resources. As forest management and quality in developing countries is particularly important for climate change policy, these results suggest that international efforts such as the United Nations Collaborative Programme on Reducing Emissions from Deforestation and Forest Degradation should pay particular attention to supporting governance and cooperation at the local level

Corporate environmental management in transition economies: The case of Central and Eastern Europe

We use firm-level data to study the adoption of Environmental Management Practices (EMPs) in the most polluting industrial sectors in Bulgaria, Hungary, Lithuania, Poland, Romania, and Slovakia during the 1990 – 1998 period when these countries were in a transition away from a centrally planned economy. Despite the stickiness of a long established managerial regime and the declines in industrial output during this period, around 42% of the firms in our sample adopted Environmental Plans (EPs) and/or established Environmental Departments (EDs). The analysis reveals that enforcement and public disclosure of the environmental performance of firms are the most important forces behind the implementation of both of these EMPs. Also, but to a lesser extent, export oriented firms and larger firms are prone to adoption. Finally, we use a methodology that clarifies some of the links between different EMPs not addressed in earlier studies. Notably, once a firm has decided to adopt (or not adopt) an ED, additional increases in enforcement do not to lead to EP implementation

REDD+ and community-controlled forests in low-income countries: any hope for a linkage?

Deforestation and forest degradation are estimated to account for between 12% and 20% of annual greenhouse gas emissions and in the 1990s (largely in the developing world) released about 5.8 Gt per year, which was bigger than all forms of transport combined. The idea behind REDD + is that payments for sequestering carbon can tip the economic balance away from loss of forests and in the process yield climate benefits. Recent analysis has suggested that developing country carbon sequestration can effectively compete with other climate investments as part of a cost effective climate policy. This paper focuses on opportunities and complications associated with bringing community-controlled forests into REDD +. About 25% of developing country forests are community controlled and therefore it is difficult to envision a successful REDD + without coming to terms with community controlled forests. It is widely agreed that REDD + offers opportunities to bring value to developing country forests, but there are also concerns driven by worries related to insecure and poorly defined community forest tenure, informed by often long histories of government unwillingness to meaningfully devolve to communities. Further, communities are complicated systems and it is therefore also of concern that REDD + could destabilize existing well-functioning community forestry systems

Economics of Soil Conservation Adoption in High-Rainfall Areas of the Ethiopian Highlands

This study measures the impact of fanya juu bunds (an important soil and water conservation technology and the most popular type of contour bund in east Africa) on the value of crop production in a high-rainfall area in the Ethiopian highlands using cross-sectional multiple plot observations. We applied switching regression, stochastic dominance analysis (SDA), and decomposition and propensity score matching methods to ensure robustness. The switching regression, SDA, and decomposition analyses relied on matched observations, which was important because regression and SDA often do not ensure that comparable plots with conservation technology (conserved) and plots without (unconserved) actually exist in the distribution of covariates. All models told a consistent story that the value of crop production for plots with bunds was lower than for plots without bunds. In addition, the yield decomposition results showed that, although there was little difference in endowments between conserved and unconserved plots, the returns to endowments were substantially higher for unconserved plots. Based on these findings, it was hard to avoid the conclusion that these technologies might reduce soil erosion and associated off-site effects, but they did so at the expense of poor farmers in the Ethiopian highlands. We concluded that unless productivity was increased—for example by increasing fodder grass production on bunds—fanya juu bunds reduced on-farm production and therefore could not be characterized as a “win-win” measure to reduce soil erosion

Economics of Soil Conservation Adoption in High-Rainfall Areas of the Ethiopian Highlands

This study measures the impact of fanya juu bunds (an important soil and water conservation technology and the most popular type of contour bund in east Africa) on the value of crop production in a high-rainfall area in the Ethiopian highlands using cross-sectional multiple plot observations. We applied switching regression, stochastic dominance analysis (SDA), and decomposition and propensity score matching methods to ensure robustness. The switching regression, SDA, and decomposition analyses relied on matched observations, which was important because regression and SDA often do not ensure that comparable plots with conservation technology (conserved) and plots without (unconserved) actually exist in the distribution of covariates. All models told a consistent story that the value of crop production for plots with bunds was lower than for plots without bunds. In addition, the yield decomposition results showed that, although there was little difference in endowments between conserved and unconserved plots, the returns to endowments were substantially higher for unconserved plots. Based on these findings, it was hard to avoid the conclusion that these technologies might reduce soil erosion and associated off-site effects, but they did so at the expense of poor farmers in the Ethiopian highlands. We concluded that unless productivity was increased—for example by increasing fodder grass production on bunds—fanya juu bunds reduced on-farm production and therefore could not be characterized as a “win-win” measure to reduce soil erosion.Ethiopia; soil conservation; matched data; decomposition

HOUSING, SPRAWL, AND THE USE OF DEVELOPMENT IMPACT FEES: THE CASE OF THE INLAND EMPIRE

"This article is concerned with the economics of excessively large and socially costly suburban expansion and attempts to summarize and organize the main economic arguments associated with sprawl due to single-family residential home construction. We also apply standard welfare economics and price policy instruments to the issue of suburban sprawl in order to suggest ways in which economics can participate in and inform the debate over sprawl. The article uses the Inland Empire, which includes the valley regions of San Bernardino and Riverside Counties in Southern California east of Los Angeles, as a case study. "("JEL "R11, R14, Q24) Copyright (c) 2008 Western Economic Association International.