On Smallholder Farmers' Exposure to Risk and Adaptation Mechanisms: Panel Data Evidence from Ethiopia

Using a moment based approach, introduced by Antle for producers’ risk behavior elicitation, we develop an empirical model to evaluate the implication of risk preferences on farm level diversification. For the purpose, we use a household level panel data of years 2004 and 2009 from Ethiopia. The estimation is done in two stages; the first one for the elicitation of risk aversion behavior of farm households and the second one, for the inclusion of the first estimate on the factors that determine the level of on-farm diversification. To control for endogeneity problem in the estimation of diversification equation, we use efficient two stage least squares technique. We find that farmers with higher level of relative risk premium will more likely opt for more on-farm diversification. The engagement of farm households to off and non-farm income generating activities could likely reduce the on-farm diversification level. These could be due to the fact that households with income from off and non-farm activities use this income as a safety net and go for specialized farms.