Does Market Experience Attenuate Risk Aversion? Evidence from Landed Farm Households in Ethiopia

• Published in: World development Vol. 98; pp. 447 - 466
• Main Authors: Melesse, Mequanint B., Cecchi, Francesco
• Format: Journal Article
• Language: English
• Published: Oxford Elsevier Ltd 01.10.2017; Pergamon Press Inc
• Subjects: Agricultural production; Aversion; Developing countries; Empirical analysis; Endogenous risk preferences; Ethiopia; Experimental economics; Farms; High risk; Historical account; Households; LDCs; Market experience; Markets; Migration; Mobility; Poverty; Preferences; Productivity; Rational choice; Risk; Risk aversion; Risk preferences; Selfselection; Trade; Violations; Ethiopia; market experience; risk aversion; experimental economics; endogenous risk preferences; Ethiopia
• ISSN: 0305-750X; 1873-5991
• DOI: 10.1016/j.worlddev.2017.05.011

•We study the impact of market experience on risk preferences of landed farm households in Ethiopia.•We measure risk aversion using lab-in-field experiments.•We employ instrumental variables approach for causal inference.•Market experience attenuates risk aversion behavior of farm households.•We address the concern of selective internal mobility and out-migration thoroughly. Risk preferences are important drivers of many relevant economic decisions of farm households. High risk aversion is a well-known trigger of “poverty traps” for farm households in developing countries. This paper analyzes the effect of market experience on risk aversion for a relatively large sample of landed farm households characterized by historically low mobility in Ethiopia. We measure risk aversion using lab-in-field experimental data, and relate it to actual market experience of household heads. We use an instrumental variable approach to address the issue of endogeneity due to possible self-selection into trade. We find that market experience attenuates risk aversion––farm households with greater market experience are more risk tolerant. Results are robust to using several alternative specifications, controlling for internal mobility, out-migration and other potential unobservables, and for violations to rational choice. Overall, this study provides strong empirical evidence that risk preferences endogenously change as a result of market experience, and can help design policies aiming to increase the productivity and efficiency of farm households.