Wednesday, December 23, 2009

Lit in Review: Three on Agricultural Risk

From the American Journal of Agricultural Economics, Vol 91, No 3 - August 2009

Di Falco and Chavas, "On Crop Biodiversity, Risk Exposure, and Food Security in the Highlands of Ethiopia," p. 599-611.
Facts: Ethiopia experienced droughts in 1965, 1974, 1983-4, 1987, 1990-91, 1999-2000, 2002. Ethiopia is a global center of genetic diversity for several crops, including barley. [A communal barley harvest in Ethiopia, right]
Method: Moment-based specification of the stochastic production function to identify how biodiversity affects the first three moments, unique farm survey, 1999-2000.
Findings: Most decision makers exhibit risk aversion and are DARA. Biodiversity increases farm productivity, even controlling for management practices and microclimate factors. Biodiversity increases skewness and variance, so higher upside and lower downside. The effects are larger on poorer soils (biodiversity and land quality are substitutes). Experience is not statistically significant.
Future research identified: This was a one year survey, so couldn't address the dynamics of management decisions.

Gramig, Horan, and Wolf, "Livestock Disease Indemnity Design When Moral Hazard is Followed by Adverse Selection," p. 624-641, ungated.
Discussion: The US Constitution requires governments to repay farmers when their livestock must be seized to prevent or treat infection. These indemnity payments are a form of implicit insurance and also, critically, disaster payment. Unconditional payments reduce the incentive for farmers to invest in biosecurity measures, particularly if they are paid the full market healthy price so that they suffer no loss at all.
Policy recommendation: Use two policies, one penalty for failure to disclose problem and one indemnity to incentivize proper levels of biosecurity investment. Belgium and the Netherlands give no payment for dead animals (so they want to report before the animal dies) and only partial payment for sick animals (so they want to invest in biosecurity). Private markets may be in conflict with the public policies.
Future research: This paper does not account of the externality and free rider problem: my optimal choice of biosecurity depends on my neighbors'.

Ito and Kurosaki, "Weather Risk, Wages in Kind, and the Off-Farm Labor Supply of Agricultural Households in a Developing Country," p. 697-710, ungated.
Method: multivariate two-limit tobit, Survey of Living Conditions, Uttar Pradesh and Bihar, 1997-98, with labor allocation in 31 (!) categories based on source of wage and whether in cash or in kind.
Facts: 41.4% of households (hhds) rely only on self-employment - largely they have more land and a higher reservation wage; 58.6% have at least one family member earnings wages, usually non-agriculture.
Findings: Education decreases the share of agricultural wage work. The more worker-age males and dependents in a hhd, the lower labor share on own-farm and more for off-farm wage work. The number of working-age females is not significant. Rainfall variance reduces own-farm labor, implying that risk makes people work off-farm. Rainfall variance increases agricultural work paid in kind and nonagricultural work, but is not statistically significant in determining agricultural work paid in cash.

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