The Effects of Relative or Absolute Risk Aversion on Production Efficiency in Agriculture: Evidence from the 'Bread Basket' of Nigeria

Abstract

We estimate stochastic frontier models for agricultural productivity using factors that proxy for absolute risk aversion (e.g. loan amounts) and factors that proxy for relative risk aversion (loan pricing or interest rates). Our findings show absolute risk aversion ceases to matter for agricultural productivity or the determination of the productivity frontier in models that incorporate both loan amounts and loan interest rates. These findings provide empirical evidence that interactions between capital and productivity within the agriculture sector are best studied within the context of the existence or imposition of a minimum required return on capital, as opposed to a focus on loan financing amounts.