Do Risk Preferences Really Matter? The Case of Pesticide Use in Agriculture

Abstract

Even if there exists an extensive literature on the modeling of farmers’ behavior under risk, actual measurements of the quantitative impact of risk aversion on input use are rare. In this article, we use simulations to quantify the impact of risk aversion on the optimal quantity of input and farmers’ welfare when production risk depends on how much of the input is used. The assumptions made on the technology and form of farmers’ risk preferences were chosen such that they are fairly representative of crop farming conditions in the USA and Western Europe. In our benchmark scenario featuring a traditional expected utility model, we find that less than 4% of the optimal pesticide expenditure is driven by risk aversion and that risk induces a decrease in welfare that varies from −1.5 to −3.0% for individuals with moderate to normal risk aversion. We find a stronger impact of risk aversion on quantities of input used when farmers’ risk preferences are modeled under the cumulative prospect theory framework. When the reference point is set at the median or maximum profit, and for some levels of the parameters that describe behavior toward losses, the quantity of input used that is driven by risk preferences represents up to 19% of the pesticide expenditure.