Eliciting farmers’ risk and ambiguity preferences in the loss and gain

Abstract

Risk and ambiguity are pervasive in farming activities. Although agricultural economists have a long tradition of analyzing risk, there is still alack of understanding of farmers' risk and ambiguity preferences. We aim at structurally estimating these preferences. We use a model that combines a second order model for ambiguity and a model that allows for differences in utility in the gain and loss domains and probability distortion. Moreover, we allow for an endogenous reference point that we estimate. We collect responses from 197 farmers. We find (i) farmers are slightly risk averse in the gain and loss domains and havean inverse s-shaped probability weighing function for risk; (ii) farmers are slightly ambiguity averse in the gain domain and ambiguity neutral in the loss domain and have an inverse s-shaped probability weighing function in the gain domain but do not distort probabilities in the loss domain; (iii) farmers have a positive reference point.

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