Risk preferences significantly affect household investment in timber forestry: Empirical evidence from Fujian, China

Abstract

Implementing another round of massive collective forest tenure reform in China since in 2008 has not materialized the government's expectation on small-scale timber forestry–improved management practices and resource quality. One underlying cause to this outcome is farmer's risk-averse attitude, which has thus far garnered little research attention. In this study, we combine the prospect theory and a lottery experiment to measure individual risk preferences on timber forestry investment. Based on a sample of 303 households conducted in 2018 in Fujian, China, we find that the ‘household risk preference’ parameter has a significant negative impact on both the decision to invest in timber forestry and the intensity of investment. Further, the ‘loss aversion’ and ‘probability weighting’ parameters affect household investment intensity negatively. These results indicate that the more risk averse rural households are, the less willing they are to invest in timber forestry, and the lower their investment intensities are. Also, the effect of the risk preferences on cash outlay is larger than on labor cost. These insights have direct implications for better designing tenure reform and other policies to promote smallholder forestry in China and beyond.