Do farmers’ risk preferences remain stable in the face of climatic shocks? Evidence from smallholder farmers in Zambia

Abstract

ABSTRACT Smallholder farmers in Africa are vulnerable to changing climatic conditions because of their dependence on rainfed agriculture. Their adaptation strategies, which are critical for food security, are oftentimes influenced by their risk-taking attitude. This study examines whether experiencing climatic shocks (defined here as drought events) shapes farmers’ risk aversion. The study addresses two crucial questions: 1) how do drought events alter risk preferences among smallholder farmers; and 2) how long does the impact last? Using a panel survey from Zambia and high spatial resolution climate data, we infer the average Arrow-Pratt and downside risk aversion coefficients from the moment of the distribution of crop production. We find that, on average, the sampled farmers are risk averse. Furthermore, farmers who experienced a drought in the previous year become more risk averse, while farmers who experienced recurring droughts within the previous three years become even more risk averse. We also find that the effect of climatic shocks on risk preferences is short term, lasting only one year. These results have implications on adaptation to climate change.