Farm Producers' Household Consumption and Individual Risk Behavior after Natural Disasters

Ahmad Zia Wahdat,Jayson L Lusk,Michael A Gunderson

doi:10.1017/age.2021.2

Ahmad Zia Wahdat, Jayson L Lusk + Show 1 more

Open Access

https://doi.org/10.1017/age.2021.2

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Abstract

AbstractUnderstanding how farm household consumption responds to adverse income shocks can provide insight into household well-being and appropriate agricultural policy. Using a split-sample survey of Indiana specialty producers, where we randomly assign respondents to treatments that vary the size of a hypothetical income shock, we estimate the relationship between income loss and household consumption. Given that postdisaster producers' risk preferences are important for business decisions, we elicit producers' risk preferences. We find that food and miscellaneous expenses are the most sensitive to income losses. We also find evidence for decreasing absolute risk aversion among producers after the income loss shock.

Highlights

A prediction of the permanent income hypothesis is that households use savings in the event of an income shock to smooth consumption over their lifetimes
Given that farm producers’ insurance, marketing, and commodity supply decisions partially depend on their risk-taking capacity (Chavas and Holt 1996; Eckman, Patrick, and Musser 1996; Zhao and Yue 2020), we investigate producers’ risk preferences after a natural disaster and income loss experience
Since an increase in risk premium translates into an increase in absolute risk aversion, we find the evidence in support of our second hypothesis (H2)

Summary

Introduction

A prediction of the permanent income hypothesis is that households use savings in the event of an income shock to smooth consumption over their lifetimes. It becomes obvious that an income shock to a low-asset household would imply a reduction in consumption expenses. Whether a reduction in expenses is concentrated in one consumption category or multiple categories is an important and relevant question for household well-being after income shocks. The objective of this study is twofold: first, to determine how farm households adjust consumption expenses after an unexpected income loss due to natural disasters, and second, to evaluate whether an income loss experience affects producers’ risk-taking behavior. We focus on specialty crop farm households in the Midwestern state of Indiana. This is due to the fact that (i) specialty

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