Risk and Rates of Time Preferences of Farm Households in Ethiopia: Implications on land investment decisions

Abstract: Summary Paper 1: Risk Preferences of Farm Households in Ethiopia: Implications to Land Investment Decisions This paper measures farmers' attitude towards risk using an experimental approach for a sample of 262 farm households in Ethiopian highlands. We find more than 50 percent of the households in severe to extreme risk aversion category, unlike similar studies in Asia, where the vast majorities are found under moderate to intermediate risk aversion category. With careful construction of the experiment, the nature of absolute, and partial risk aversion are examined, and our data supports the presence of DARA, and IPRA behaviour. A significance difference in behaviour in between games involving actual loss and opportunity loss are also observed. Furthermore, households show a tendency of less risk aversion in hypothetical games intentionally incorporated in our experiment. Our experimental measures are extrapolated to actual farm investment behaviour and a negative relationship between the degree of risk aversion and fertilizer adoption decision is witnessed by our data, showing a rational disregard by most of the households in the study village for agricultural intensification decisions. The validity of some of the predictions of the expected utility theory is tested and the predictions of risk neutrality for smaller stakes, and similar preferences for gains and losses that stem from the major tents of the theory, i.e. concavity and asset integration, are not supported by our experiment. Paper 2: Rates of Time preference of Farm Households in Ethiopia: Does consumption seasonality matter? This paper measures farmers' attitude towards their rates of time preference (RTP) using an experimental approach for a sample of 262 farm households in Ethiopian highlands. The median RTP rates are found to be very high and are almost double the interest rate on the outstanding debt. The discount rates decline as we move from the short period-smaller reward to longer period-larger reward experiments, depicting the presence of timeframe and magnitude effects in RTP experiments. Our experiment also evidences the presence of delay-speedup asymmetry in a single-parameter based discounting approach. Significant differences in discount rates in surplus and dry seasons are observed in our experiment, depicting the impact of consumption seasonality in household time preferences. Given imperfect credit markets, household wealth (physical asset) levels are found to be highly correlated to this attitude measure. Our experimental measures are extrapolated to actual farm