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WASCAL (West African Science Service Center on Climate Change and Adapted Land Use). Work Package 5.2 Economic Evaluation of Risk Management Strategies
Project
Project code: keine Angabe
Contract period: 01.10.2012
- 30.04.2016
Purpose of research: Inventory & Assessment
Climate change may affect agricultural households and communities in West Africa in different ways, depending on the direction of the change and on the preparedness of the household. High risk aversion of agents in the agricultural sector of low-income countries often hampers the spread of innovative technologies or farming practices. Risk-management instruments, like investment in better technologies, the diversification of the agricultural production mix, reserve holding as well as contracting or insurances, can mitigate the income risk for farmers and therefore contribute to the spread of innovative coping and adaptation concepts. These instruments are interdependent as the effect of a certain measure on the overall risk exposure depends on the constellation of all other instruments, which requires an integrated approach to risk management that considers the full set of risk management instruments simultaneously to ultimately arrive at an optimal mix of instruments.
Economic analysis of risk management strategies consists basically of two components: risk assessment and risk preferences. Risk assessment is typically presented in the context of probability assessments, which associate potential outcomes of a farmer’s production plan with different states of nature. Having specified the probability distributions of alternative farm-plans, the farmer’s decision problem is then to rank the production plans according to their probability distributions and select the one that best meets her goals.
The conceptual complexity of both, probability assessment and risk preferences, has given rise to the question whether economic models for risk management always have to build on these components. A state-contingent approach is proposed as an alternative characterization of choice under uncertainty, which does not require a probability assessment of output risk, and is applicable independently of the risk preferences of the decision maker. The decision on the appropriate approach to assess risk management strategies will be part of the methodological studies in this WP.
Section overview
Subjects
- Agroeconomics
- Climate Change
Collaborative Project
WASCAL (West African Science Service Center on Climate Change and Adapted Land Use) Research Program
Framework programme
BMBF - FONA (Research for Sustainable Development) - Research Framework Programme for Sustainability
