Heterogeneity in in farmers’ preferences for risk and contract’s attributes: Behavioral evidence fro from a dis iscrete choice experiment and a ris risk pre references eli licitation task Dr. Isabelle BONJEAN H2020-SFS-2014-2 SUFISA Grant agreement 635577 1
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Introduction In CONDITIONS STRATEGIES PERFORMANCES S 1 How do we observe choices? Market Imperfections Policy and Regulations “What did you do?” Revealed preference S 2 “What would you do?” Stated preferences: Why? EXPERIMENTS Preferences Choices 06/05/2019 Isabelle BONJEAN 2
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Introduction In • Experiments are a con ontroll lled da data gen generatin ing pro process (Croson Gächter, 2010) • controlled : most factors which influence behavior are held constant and only one factor of interest (the treatment) is varied at a time • enable to draw causal l inferences Powerful tool for evid idence-based po poli licy • Experiments can be: • naturally occuring : the process occurs naturally (rare cases) • laboratory/field experiments : the researcher controls the data generating process 06/05/2019 Isabelle BONJEAN 3
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Context The Survey: • from January-March 2018 • Sector: apple and pear in Flanders • Participation rate: about 20% • First contact by phone or face-to- face then online questionnaire • Common questionnaire of SUFISA + 2 experiments 06/05/2019 Isabelle BONJEAN 5
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Context The Sector: • Highly educated producers • Rather entrepreneurial and business-oriented • Light-subsidy sector • The sector is in crisis: • Russian Boycott • Oversupply 06/05/2019 Isabelle BONJEAN 6
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Motivation for investigation “Risk” and “Contracts” • Risk is in inherent to o ag agricultural production => plays a key role in the decisions farmers make every day • Growing concern because of clim climatic dysfonctioning: more frequent, unpredictable and deep negative shocks • Mar arket lib liberali lization: increased exposure of farmers to price volatility • Yet, farmers are the actors in su supply ch chain ins who are most at risk • In the case-study: • Frost of April 2016… • Strong criticism of cooperatives… 06/05/2019 Isabelle BONJEAN 7
Experiment 1 Experiment 2 Risk Preferences Preferences for Contracts 06/05/2019 Isabelle BONJEAN 8
Experiment 1 Risk Preferences 06/05/2019 Isabelle BONJEAN 9
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Motivation Experiment 1 Two is issu sues regardin ing th the understandin ing of of Risk Preferences 1. Confronting theories: • Expected Utility Theory : risk aversion • Cumulative Prospect Theory : risk aversion + loss aversion + probability distortion (Kahneman and Tversky – Nobel Prize 2002) 06/05/2019 Isabelle BONJEAN 10
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Motivation Experiment 1 Two is issu sues regardin ing th the understandin ing of of Risk Preferences 1. Confronting theories: • Expected Utility Theory : risk aversion • Cumulative Prospect Theory : risk aversion + loss aversion + probability distortion (Kahneman and Tversky – Nobel Prize 2002) 2. Still performing poorly at explaining farmer’s decision -making 06/05/2019 Isabelle BONJEAN 11
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Methods Experiment 1 • Laboratory experiments: Risk Preference Elicitation Task Lottery A (safer) Lottery B (riskier) 680 € 1 00 € 400 € 5 0 € [E(A) = 190] [E(A) = 77] 06/05/2019 Isabelle BONJEAN 12
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Methods Experiment 1 • Laboratory experiments: Risk Preference Elicitation Task Lottery A (safer) Lottery B (riskier) 3000 € 1 00 € 400 € 5 0 € [E(A) = 190] [E(A) = 345] 06/05/2019 Isabelle BONJEAN 13
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Methods Experiment 1 • Laboratory experiments: Risk Preference Elicitation Task Lottery A (safer) Lottery B (riskier) INCENTIVIZED ! Played for real money 3000 € 1 00 € 400 € 5 0 € [E(A) = 190] [E(A) = 345] 06/05/2019 Isabelle BONJEAN 14
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Risk Preferences: Results Experiment 1 1. Empirical input for hypothesis testing in behavioural economics: Cumulative Prospect Theory In average, producers are: • Very risk-averse • Not loss-averse • Do distort probabilities 06/05/2019 Isabelle BONJEAN 15
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Risk Preferences: Results Experiment 1 1. Empirical input for hypothesis testing in behavioural economics: Cumulative Prospect Theory 2. Flemish apple-pear producers are less loss-averse than French arable crops farmers Bocquého et al, 2014, ERAE 06/05/2019 Isabelle BONJEAN 16
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Risk Preferences: Results Experiment 1 1. Empirical input for hypothesis testing in behavioural economics: Distribution of loss-aversion Cumulative Prospect Theory 2. Flemish apple-pear producers are less loss-averse than French arable crops farmers 3. High level of heterogeneity in risk preferences 06/05/2019 Isabelle BONJEAN 17
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Risk Preferences: Results Experiment 1 1. Empirical input for hypothesis testing in behavioural economics: Distribution of loss-aversion Cumulative Prospect Theory 2. Flemish apple-pear producers are less loss-averse than French arable crops farmers 3. High level of heterogeneity in risk preferences Very loss-averse producers are (20%): “Relatively young and low-educated farmers, having inherited a relatively small farm that they manage alone” 06/05/2019 Isabelle BONJEAN 18
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Risk Preferences: Results Experiment 1 1. Empirical input for hypothesis testing in behavioural economics: Cumulative Prospect Theory 2. Flemish apple-pear producers are less loss-averse than French arable crops farmers 3. High level of heterogeneity in risk preferences 4. We explain farmers ’ strategies and performances 06/05/2019 Isabelle BONJEAN 19
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Risk Preferences: Results Experiment 1 • More risk-averse farmers Hail insurance 1. Empirical input for hypothesis testing in behavioural economics: • More loss-averse famers Pre-harvest contract Cumulative Prospect Theory • Farmers who distort probabilities Online sales 2. Flemish apple-pear producers are • Investment in preventive measures is mainly less loss-averse than French arable explained by wealth, on top of risk-aversion crops farmers 3. High level of heterogeneity in risk preferences 4. We explain farmers’ strategies and performances 06/05/2019 Isabelle BONJEAN 20
Experiment 2 Preferences for Contracts 06/05/2019 Isabelle BONJEAN 21
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Motivation Experiment 2 • Preferences for contracts’ attributes: Discrete Choice Experiment 06/05/2019 Isabelle BONJEAN 22
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Motivation Experiment 2 • Preferences for contracts’ attributes: Discrete Choice Experiment • Provides policy relevant information: • What is important to people? • How might people trade-off between attributes? • Simulation of possible scenarios and cost-effectiveness of different measures? • Difficulty: complex to design and analyse 06/05/2019 Isabelle BONJEAN 23
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Motivation Experiment 2 • Preferences for contracts’ attributes: Discrete Choice Experiment ATTRIBUTES LEVELS INTERMEDIARY YES NO TIMING BEFORE THE HARVEST AFTER THE HARVEST PRICE POOLING NO YES PRICE VOLATILITY CONSTANT PRICE REDUCED VOLATILITY HIGH VOLATILITY AVERAGE PRICE/KG -30% ; -20% ; -10% ; 0 ; +10% ; +20% ; +30% of [average price of the most important cultivar] 06/05/2019 Isabelle BONJEAN 24
Introduction Context Motivation Experiment 1 Experiment 2 Recommendations Preferences for Contracts: Results Experiment 2 • Heterogeneous Preferences: (latent class model) Group 1: Group 2: Group 3: Group 4: ATTRIBUTES 42% 28% 16% 14% INTERMEDIARY INTERMEDIARY NO INTERMEDIARY TIMING AFTER HARVEST PRICE POOLING NO PRICE POOLING PRICE VOLATILITY MEDIUM AVERAGE PRICE/KG +++ + + 06/05/2019 Isabelle BONJEAN 25
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