Risk aversion and credit constraints in farmers' decision‐making: A reinterpretation

In 1976 the Agricultural Development Council sponsored a conference on ‘Risk, Uncertainty and Agricultural Development’ which has been summarised in a volume edited by James Roumasset, Jean‐Marc Boussard and Inderjit Singh [1979]. The volume provides an excellent review of the state of the art at that time. However, as discussed in the summary chapters of that volume, there were few theoretical, empirical, or policy issues on which clear conclusions could be reached on the basis of knowledge then available. In the intervening years progress has been made on a number of issues as a result of both empirical investigations and theoretical advances. This paper concentrates on advances which have relevance to the controversy about the relative roles of risk aversion and credit constraints in limiting farmers’ investment levels, especially for purchased inputs such as seeds or fertilizers. In particular, we review recent experimental studies on the extent of risk aversion among farmer populations in developing countries. We then consider recent theoretical insights into the causal relationships between risk, risk aversion, and imperfect information on the one hand, and credit‐market imperfections or constraints on the other.