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Comparing experiments for modelling farm risk management decisions with a focus on extreme weather losses

Author

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  • Duden, Christoph
  • Offermann, Frank
  • Mußhoff, Oliver
Abstract
Extreme weather events pose an economic threat to farms. The risk management behaviour against such events is often studied using prospect theory as a framework, but empirically deriving corresponding parameters in the field involving farmers is challenging. To address this issue, we compare three methods of eliciting prospect theory parameters using a multiple price list design in Germany: a framed field experiment, a framed student experiment and an artefactual field experiment. The results show that these experiments generate different prospect theory parameters. The lower the probability the higher the differences, which is particularly important for managing risk from low-probability shocks. Despite these differences, the mean coefficients of the three experiments reveal a low willingness to pay for crop insurance. We find evidence that individual responses to the artefactual and student experiments correlate with the risk attitude self-assessment, whereas responses to the framed field experiment correlate with the purchase of crop insurance.

Suggested Citation

  • Duden, Christoph & Offermann, Frank & Mußhoff, Oliver, 2023. "Comparing experiments for modelling farm risk management decisions with a focus on extreme weather losses," DARE Discussion Papers 2301, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).
    • Handle: RePEc:zbw:daredp:2301
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    References listed on IDEAS

    as
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    4. Sven Grüner & Mira Lehberger & Norbert Hirschauer & Oliver Mußhoff, 2022. "How (un)informative are experiments with students for other social groups? A study of agricultural students and farmers," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 66(3), pages 471-504, July.
    5. Freese, Von Jan & Steinmann, Horst-Henning, 2005. "Ergebnisse des Projektes „Randstreifen als Strukturelemente in der intensiv genutzten Agrarlandschaft Wolfenbüttels“," 54th Annual Conference, Goettingen, Germany, September 17-19, 2014 187346, German Association of Agricultural Economists (GEWISOLA).
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    Keywords

    prospect theory; risk management; catastrophic risk; behavioural economics; decision analysis;
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