Consumption Risk, Technology Adoption, and Poverty Traps : Evidence from Ethiopia

Much has been written on the determinants of input and technology adoption in agriculture, with issues such as input availability, knowledge and education, risk preferences, profitability, and credit constraints receiving much attention. This paper focuses on a factor that has been less well documented-the differential ability of households to take on risky production technologies for fear of the welfare consequences if shocks result in poor harvests. Building on an explicit model, this is explored in panel data for Ethiopia. Historical rainfall distributions are used to identify the counterfactual consumption risk. Controlling for unobserved household and time-varying village characteristics, it emerges that not just ex-ante credit constraints, but also the possibly low consumption outcomes when harvests fail, discourage the application of fertilizer. The lack of insurance causes inefficiency in production choices.

Bibliographic Details

Main Authors:	Dercon, Stefan, Christiaensen, Luc
Language:	English
Published:	World Bank, Washington, DC 2007-06
Subjects:	AGENTS, AGRICULTURE, ASSETS, BORROWING, BUDGET CONSTRAINT, BUDGET CONSTRAINTS, CONSUMER PRICE INDEX, CONSUMPTION DECISIONS, CONSUMPTION MODEL, CONSUMPTION PATH, COST OF CREDIT, CREDIT CONSTRAINT, CREDIT MARKET, CREDIT MARKET IMPERFECTIONS, CREDIT MARKETS, CURRENT CONSUMPTION, DATA SET, DECISION MAKING, DECREASING RATE, DEVELOPING COUNTRIES, DIFFERENTIAL IMPACT, DISTRIBUTION DATA, ECONOMIES OF SCALE, EMPIRICAL ANALYSIS, EMPIRICAL EVIDENCE, EMPIRICAL MODEL, EMPIRICAL RESULTS, ENDOGENOUS VARIABLE, EXPECTED RETURNS, EXPECTED VALUE, EXPECTED VALUES, FIXED COSTS, FIXED INPUTS, HISTORICAL DATA, HOUSEHOLD CHARACTERISTICS, HOUSEHOLD COMPOSITION, HOUSEHOLD SURVEY, HOUSEHOLDS, IMPERFECT CREDIT, INCOME, INCOME PROCESS, INCOME SHOCKS, INCREASING FUNCTION, INEFFICIENCY, INFLATION, INFORMAL INSURANCE, INSURANCE, INSURANCE MARKETS, INTEREST RATE, INTEREST RATES, INTERTEMPORAL CONSUMPTION, LABOR MARKET, LEVELS OF CONSUMPTION, LIQUIDITY, LIQUIDITY CONSTRAINT, LIQUIDITY CONSTRAINTS, LOW INFLATION, MARGINAL PRODUCTIVITY, MARGINAL UTILITY, MARGINAL UTILITY OF CONSUMPTION, MARGINAL VALUE, NATURAL LOGARITHM, NEGATIVE SHOCKS, OPTIMIZATION, PERMANENT INCOME, POLICY RESEARCH, PORTFOLIOS, PRICE CHANGES, PRICE FIXING, PRICE RISK, PRODUCT MARKETS, PRODUCTION FUNCTION, PROFITABILITY, PURCHASE PRICE, RATIONAL EXPECTATIONS, RISK AVERSE, RISK AVERSION, RISK TAKING, SAVINGS, SIGNIFICANT IMPACT, SUNK COSTS, TRANSACTIONS COSTS, UTILITY FUNCTION, WEALTH,
Online Access:	http://documents.worldbank.org/curated/en/2007/06/7726736/consumption-risk-technology-adoption-poverty-traps-evidence-ethiopia https://hdl.handle.net/10986/7417
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