Estimating risk attitude impact on allocative efficiency under different plantain-based cropping systems: A latent factor model with instrumental variables

Abstract

Plantain production is subject to risk, emerging from diverse sources. Consequently, risk modifies farmers behavior, affecting their decision making and thereby their future results. These choices are not only related to investments, crop to produce, and technology use but also to resource allocation. The objective of this study is to analyze the impact of farmers’ risk attitude on allocative efficiency in plantain production. Primary data from 584 farmers, operating on 707 plots, selected through a four-level stratified random sampling was used. The study used the Latent factor models with instrumental variables to account for endogeneity and selection bias. We apply the causal inference methods to assess the impact of risk attitude on allocative efficiency. The result highlights a negative impact of risk attitude on the allocative efficiency. Compared to non-averse farmers, risk-averse farmers are less efficient. Also, as the level of risk aversion increases, the negative impact of risk aversion is more pronounced (-49.1% for extreme risk aversion). Furthermore, stronger impact of risk attitude regardless the level of risk aversion is found for the type 3 which stands for the intensive cropping system. The study provides empirical evidence of the extent of the impact of risk attitude on the allocative efficiency and confirms the heterogeneity of impact assumption. It also provides a useful insight into the key role risk attitude plays in productivity and efficiency in agriculture. These findings have critical policy implications and can help policymakers and practitioners make informed decisions and devise interventions to improve farmers allocative efficiency.