Risk preferences of commodity crop producers and specialty crop producers: An application of prospect theory

Shuoli Zhao, Chengyan Yue

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

Producers’ decisions, such as crop insurance, contract agreement, and technology adoption, involve considerable risk and uncertainty. Particularly, specialty crop production is more vulnerable to risk and requires more intensive management than commodity crop production, while risk mitigation tools for specialty crop production are comparatively limited. We apply Prospect Theory (PT) to analyze risk preferences of U.S. producers, and further compare the preference differences between commodity crop and specialty crop producers. Reference dependent, diminishing sensitivity, loss aversion, and probability weighting, as well as certain farm characteristics and producer demographics, are found to have a significant impact on grower risk attitudes. In addition, we do not observe significant differences in the base PT estimates between commodity crop and specialty crop producers. However, the relationships between risk behavior and individual characteristics vary between the two types of producers, which shed lights on the development of agricultural policies and provide implications for the design of contract and insurance.

Original languageEnglish (US)
Pages (from-to)359-372
Number of pages14
JournalAgricultural Economics (United Kingdom)
Volume51
Issue number3
DOIs
StatePublished - May 1 2020

Keywords

  • commodity crop
  • crop insurance
  • prospect theory
  • specialty crop

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