Risk attitudes, consumption preferences, and crop choices in the Pakistan Punjab

This dissertation investigates the effects of risk on farm production decisions. A non-separable household model of crop choice is developed that allows not only risk attitude but also consumption preferences to affect crop choices, when risky markets exist for all consumption items. The model is estimated structurally using cross-section survey data from the rice-wheat zone in the Pakistan Punjab. Using a non-nested likelihood test, this study empirically shows that consumption preferences affect crop choices significantly.;The decision model assumes that risky markets exist for all consumption goods but insurance markets are incomplete. Based on expected utility maximization defined on household income and consumption prices, the model explains farmers' desires to grow staple grain for their own consumption as an insurance against consumption price risk and those to grow fodder crops for their livestock animals as an insurance against input price risk. The strength of these motivations depends on households' risk and consumption preferences.;The empirical model consists of optimal-crop-choice first-order conditions, technological constraints on crop choices, and a consumption demand system. The demand stem is added so that consumption preferences are estimated reliably. These structural equations are estimated jointly by a full information maximum likelihood method. In addition to the cross-section household data, time-series data of market prices and regional crop yields are used to characterize market and production risk.;Estimation results are consistent with households' risk-averse attitudes and incomplete insurance markets. Holding wealth in the form of livestock is found to increase farmers' willingness to bear risk. Vuong's non-nested specification test supports the superiority of the model with consumption preference effects against a model without these effects. The test result demonstrates that production decisions by sample households are affected not only by their risk attitudes but also by their consumption preferences, even when markets for all consumption items exist. A sensitivity analysis based on the structurally estimated model shows that the motivation of input price insurance via fodder production dominates the consumption insurance motivation in the study area.