Risk aversion and certification: Evidence from the Nepali tea fields

Abstract

Abstract By setting out rules for how food should be produced and processed to meet market requirements, agricultural standards can connect farmers to lucrative markets. Yet their adoption has been far from widespread. Demographic factors have been shown to affect farmers’ decision to get certified to an agricultural standard. However, little is known about the relationship between risk and certification, despite evidence that risk aversion affects farmers’ production decisions. This paper examines the role of individual risk attitudes in the decision to get certified to an agricultural standard. I conducted a survey and a field experiment to elicit the risk preferences of Nepali small-scale tea farmers who faced the decision of whether to get certified to the organic standard. The analysis uses an expected utility framework to investigate the relationship between risk preferences and certification decisions. Results indicate that farmers who are more risk averse have a higher propensity to get certified. These findings suggest that risk considerations should be incorporated into analysis of certification. They also provide concrete evidence against previous assumptions that only risk lovers get certified. Instead, they suggest that certification schemes may provide a benefit not yet considered in the literature: that of providing risk-reduction opportunities to risk averse farmers in developing countries.