Potato farmers’ decision-making under uncertainty : a study about farmers’ reference points and domain specific risk preferences.

University essay from SLU/Dept. of Economics

Abstract: Swedish agriculture has declined for several decades, and for potato cultivation, the decrease has been particularly dramatic. At the same time, Sweden has adopted a national food strategy that aims to increase the production of foodstuff in Sweden. If this strategy is to be realized, the trend of declining production must be reversed. To understand how the potato industry can develop, there is a need for better knowledge of how potato farmers make decisions under risk in potato cultivation. This study aims to understand how potato growers’ revenue targets affect risk-taking in cultivation decisions, and how other factors affect farmers’ willingness to take risks in their farm businesses. Potato farmers are basically risk averse and the industry needs to find ways to shift the risk from the individual farmer to other actors in order to create a better functioning of potato market that generates higher yields and greater profits on the potato market. For instance, the average farmer is prepared to forgo a six percent increase in average revenue, if the increase will result in a greater increase in the fluctuation of annual revenue. Farmers’ decision making is affected by their revenue targets, with a higher revenue target contributing to farmers being less risk-averse in cultivation in in the pursuit of increase revenue. There are also tendencies for a revenue target to function as a reference point for farmers to relate to. At the same time, the potato growers who have a desire to control and minimize the risks surrounding cultivation in the short term are also more willing to take more risks in the cultivation to maximize results in the longer term. The study was conducted as a quantitative experiment with an experimental survey, where potato farmers answer questions about which of different revenue distributions they would prefer. The survey also included questions about respondents’ potato cultivation, and which actions the they see as important in creating a more stable result for their business. The analysis uses statistical correlation tools and knowledge from previous studies from a Prospect theory perspective.

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