Introduction to the Special Issue on Risk Behaviour of Market Participants

• Published in: European review of agricultural economics Vol. 31; no. 3; pp. 233 - 234
• Main Author: Mahul, O.
• Format: Journal Article
• Language: English
• Published: Oxford Oxford University Press 01-09-2004; Oxford Publishing Limited (England); Oxford University Press (OUP)
• Subjects: Economics and Finance; Humanities and Social Sciences; Leerstoelgroep Marktkunde en consumentengedrag; Marketing and Consumer Behaviour; Marktkunde en Consumentengedrag; MGS
• ISSN: 0165-1587; 1464-3618; 1464-3618
• DOI: 10.1093/erae/31.3.233

Risk has been examined for a long time in the field of agriculturaleconomics. Almost all individual and collective decisions are made in anuncertain environment. To understand how market participants respond torisk, economists and psychologists have developed the concepts of riskperception and risk attitude. Risk perception reflects the decision-maker’sinterpretation of the likelihood of exposure to the content of the risk and isdefined as a decision-maker’s assessment of the risk inherent in a particularsituation. On the other hand, risk attitude reflects the extent to which thedecision-maker general or consistently dislikes or likes the risk content.It is important to emphasise that risk attitude and risk perception are twodistinct concepts. If one could quantify a decision maker’s risk attitude andrisk perception, one could predict his risk behaviour. How decision makerswill respond to risk also depends on the risk content. Participants in themarketing channel interact, and this interaction, which may take the formof various contract relationships, can influence the risk content they faceand may also influence their risk attitude and risk perception.How can we manage risk? At the farm level, various risk managementinstruments have been developed. Commodity futures and options and cropinsurance programmes have been heavily researched in the literatureregarding their performance in reducing risk and their use by farmers andagribusiness companies. The first paper in this Special Issue, by Garcia andLeuthold, reviews the various aspects of futures and options that have beenstudied, and makes various suggestions for future research. Garcia andLeuthold consider that one of the topics that needs to be addressed is howthe measurement of risk attitude influences our understanding of riskbehaviour. Nelson and Escalante address this issue by deriving a constantrelative risk aversion (CRRA) location-scale function for modelling choiceunder uncertainty. They argue that a mean-variance objective functionexhibiting well accepted behavioural assumptions (e.g., decreasing absoluterisk aversion) can contribute to a fuller exploration of the location-scaleapproach in agricultural risk management. Numerous factors have beenidentified that influence trading behaviour in futures and options markets.Tuthill and Frechette investigate under which conditions a risk-aversehedger may be inclined to adopt speculative behaviour in unbiasedmarkets. While this behaviour is not rational under the standard expected utility theory, they show that such behaviour can be rationalised under therank-dependent expected utility theory when the risk averse hedger adoptsan optimistic attitude towards risks.Coble, Miller, Zuniga and Heifner use the expected utility framework toinvestigate producers’ hedging decisions when government-sponsored cropinsurance programmes and the loan deficiency programme (LDP) areavailable. They find strong substitution effects between the price supportprogramme and the demand for hedging. This result is not surprising asprice supports act as free put options with yield-contingent hedge ratios.The demand for hedging and insurance is reconsidered in the presence ofLDP and the counter cyclical programme (CCP) by Wang, Makus andChen and by Hauser, Sherrick and Schnitkey. Using an expected utilitymaximisation model, Wang, Makus and Chen show that hedging andinsurance instruments play a very limited role when CCP and LDP areembedded in government programmes, as is the case under the US 2002Farm Bill. Hauser, Sherrick and Schnitkey examine how the differentprivate and public programmes are correlated, using a simulation model.They argue that the CCP does not duplicate or substitute strongly for cropinsurance programmes, because the payments are triggered differently, andthat the CCP’s influence on hedging and insurance decisions is unclear.Bourguignon, Lambert and Suwa-Eisenmann study the effect of tradeexposure on households’ income volatility in less developed countriesexporting cash crops. They explain how the macroeconomic risk on exportprices spreads into the economy and among social groups. Sinceagricultural marketing channels are partly driven by consumers, anunderstanding of consumers’ risk behaviour associated with agriculturalproducts is crucial for agriculture. In the final contribution to this issue, Hu,Hunnemeyer, Veeman, Adamowicz and Srivastava study the trade-off thatconsumers make between environmental and health benefits of agenetically modified food and disutility arising largely from risk. They findconsiderable heterogeneity in consumer behaviour: consumers can besegmented into four clearly defined groups, and their willingness to tradeoff risk against benefits associated with GM food depends on variousindividual and household characteristics.This special issue of the ERAE offers original contributions on riskbehaviour of market participants with, on the producer side, particularemphasis on the hedging and insurance decisions under multipleuncertainty and, on the consumer side, special attention to the willingnessto pay for food safety. The papers combine both conceptual analyses andempirical illustrations. They show that the agricultural sector, in itsbroadest sense, is a great area to address new issues and test new ideasabout individual and collective behaviours towards risk.