Measurement of cost inefficiency with safety first measure of risk

The objectives of this paper are to incorporate a measure of risk aversion in the translog frontier cost function to estimate cost inefficiency. Risk-averse behaviour of farmers is hypothesised to reduce efficiency by leading to a situation in which the marginal value product of an input is less than price. In developing agriculture, farmers are aware of their subsistence needs and seek to minimize the probability of their incomes falling below a disaster level of income. Using such a safety first principle, a measure of risk-taking is developed and explained by socio-economic characteristics. This measure is used in the translog cost function as a fixed input and, using the frontier approach (with half normal distribution of inefficiency disturbance), a measure of cost inefficiency is obtained. This is related to socio-economic characteristics such as education, assets and holding size. A survey data of 436 farmers for the North-West Frontier Province of Pakistan is used to reach policy conclusions for reducing cost inefficiency

Impact of risk on HYV adoption in Bangladesh

The objectives of this paper are to develop a measure of risk aversion based on the safety-first principle. The risk coefficient for a large number of farmers was positive indicating the tendency towards gambling in Bangladesh agriculture. Farmers who were near subsistence income (disaster level of income) tended to choose riskier crops such as HYV rice. The risk-aversion variable was highly correlated with demographic and socioeconomic variables. Large holders of land tended to be relatively more risk-averse than small holders of land and area allocated to HYV proportionally declined with increases in holding size. A three-equation model on HYV adoption decisions, fertilizer and hired labour was estimated with a risk-aversion variable based on the safety-first principle, and expected and significant signs were obtained with the risk-aversion variable in HYV and hired labour equations