Managing catastrophic risks in agriculture: Simultaneous adoption of diversification and precautionary savings

Abstract

The use of multiple risk management tools at the same time is a common practice among the farming communities around the world. However, most of the previous studies ignored the correlation among the risk management adoption decisions and the potential for simultaneous adoption of the risk management tools. This study is therefore, designed to investigate the impact of farm and farm household characteristics, farmer’s perceptions of catastrophic risk sources and farmer’s attitude towards risk on their decisions to adopt diversification and precautionary savings to manage farm risk keeping in view the possible correlation between the risk management adoption decisions using a bivariate and multinomial probit models. 330 respondents are randomly selected from Khyber Pakhtunkhwa Province of Pakistan using a multistage sampling technique. The results confirmed the correlation between the risk management adoption decisions and revealed that adoption of one risk management tool may make it more likely to adopt the other risk management tool at the same time. Moreover, the results also highlighted the role of age and education of the household head, monthly household income, land ownership status and risk averse nature of the farmers on the decisions to adopt diversification and precautionary savings to manage farm risks. The use of both bivariate and multinomial probit approaches provides richer interpretations, better inferences, and more information that may further improve understanding of the risk management decisions of farmers and will help policy maker to better anticipate which farmer will adopt government support risk management tool in the presence of traditional risk management tools.