Innovation in Agricultural Risk Management. A Behavioral Economic Approach

This thesis investigates the behavioral mechanisms and drivers that hinder or facilitate farmers’ adoption of innovative risk management strategies. A relatively small but growing research stream shows that farmers’ decisions to manage risk in their farms are often affected by behavioral factors like habits, experience, subjective expectations of future events, risk and uncertainty attitudes. The thesis focuses on the adoption of the latest risk management tool proposed under the EU Common Agricultural Policy (CAP): the Income Stabilization Tool (IST). The IST is a mutual fund which aims at stabilizing farm income over time. In particular this thesis is centered on the recent introduction, in 2019, of an IST scheme for the apple sector in the Autonomous Province of Trento (PAT), in Italy. To date, this is the only region in the whole EU that has developed this new risk management tool since its introduction in the 2013’s CAP reform. The thesis explores farmers’ decision to adopt this new tool performing two distinct but interrelated empirical analyses. The first study (study 1) explores behavioral mechanisms and drivers that can explain farmers’ decisions to participate to the new IST scheme using a three years (2019- 2021) panel dataset of 3,268 apple producers from the PAT. This dataset contains information on farmers’ risk management decisions as well as farm and farmers’ characteristics. The behavioral model estimated in this study builds on a specific behavioral framework, the Unified Theory of Acceptance and Use of Technology (UTAUT) proposed by Venkatesh et al in 2003. The model is estimated using a logit model via the Mundlak–Chamberlain procedure. Results suggest that a higher crop production specialization and previous experience with similar tools increase participation in the IST. Interestingly, the adoption of the IST is mediated by farmers’ engagement with on-farm protection strategies (i.e., hail-nets and anti-frost systems), leading to a discussion of the presence of adverse and advantageous selection effects. The second empirical application (study 2) explores the internal and external validity of risk and uncertainty preferences elicited via a super-contextualized field experiment. External validity is explored by testing whether risk and uncertainty preferences are able to explain farmers’ decisions regarding the adoption of the IST and other risk management tool. This information is provided by the secondary data used in the first empirical application. The experiment was conducted in 2021 with a sample of 152 apple producers. The experimental results show that farmers are more averse to uncertainty than to risk. A higher degree of contextualization does not undermine the internal validity of elicited behavioral factors, while it can improve their external validity. These results provide support for using contextualized experiments that simulate real-world decision environment. Overall, these results indicate that behavioral drivers such as habit, experience, risk and uncertainty preferences play a role in explain farmers’ decision to adopt innovative risk management solutions. Institutions, organizations and private insurance companies that develop new risk management tools should consider these drivers when designing new tools, if they want to increase farmers’ adoption and improve farmers’ welfare.