Scandinavian Working Papers in Economics

Working Paper Series,
Norwegian University of Life Sciences, School of Economics and Business

No 15-2015: Climate risk and state-contingent technology adoption: The role of risk preferences and probability weighting

Stein T. Holden () and John Quiggin
Additional contact information
Stein T. Holden: School of Economics and Business, Norwegian University of Life Sciences, Postal: Norwegian University of Life Sciences, School of Economics and Business, P.O. Box 5003 NMBU, N-1432 ├ůs, Norway
John Quiggin: School of Economics, University of Queensland, Postal: Brisbane St Lucia, QLD 4072, Australia

Abstract: Climate risk represents an increasing threat to poor and vulnerable farmers in drought-prone areas of Africa. This study assesses the maize and fertilizer adoption responses of food insecure farmers in Malawi, where Drought Tolerant (DT) maize was recently introduced. A Field experiment, eliciting relative risk aversion, loss aversion and subjective probability weighting parameters of farmers, is combined with a detailed farm household survey. A state-contingent production model with cumulative prospect theory preferences is estimated. More risk averse households were more likely to have adopted DT maize, less likely to have adopted other improved maize varieties and less likely to have dis-adopted traditional local maize. Exposure to past drought shocks stimulated adoption of DT maize and dis-adoption of local maize. Over-weighting of small probabilities was associated with less use of fertilizer on all maize types.

Keywords: Climate risk; state-contingent production; subjective probability weighting; loss aversion; technology adoption; adaptation; maize; Drought Tolerant maize; fertilizer use.

JEL-codes: C93; D03; O33; Q12; Q18

51 pages, October 12, 2015

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