Attitudes Toward Risk among Peasants:
An Econometric Approach
Edgardo Moscardi and Alain de Janvry
Attitudes toward risk among peasants in Puebla, Mexico, are derived from survey data
in a model of safety-first beha vior. The measurements of behavior toward risk obtained
are then explained by a set of socioeconomic and structural variables that characterize
peasant households. Knowledge of the determinants of attitudes toward risk is, in turn,
useful for the purpose of tailoring technological recommendations to particular
categories of peasants.
Key words: Mexico, peasants, risk aversion, technological change.
A number of recent studies have evidenced
the importance of risk on decision making by
peasants (Dillon and Anderson, Wolgin,
Wiens) and farmers (Lin, Dean, and Moore;
Boussard and Petit). Attitudes toward risk are
major determinants of the rate of diffusion of
new technologies among peasants and of the
outcome of rural development programs. If
they are going to be effective, new tech-
nologies and rural development programs
need to be tailored to the attitudes toward risk
of particular categories of peasants. For this
purpose, it is important to identify the specific
determinants of behavior toward risk and to
quantify their impact on decision making.
This paper starts by examining the extent to
which risk may be responsible for discrepan-
cies between peasants' demand for fertilizer
without risk and actual demand under risky
conditions. For this purpose, risk is intro-
duced in a model of economic decision making
as a safety-first rule. According to this rule, an
important motivating force of the decision
maker in managing the productive resources
that he controls and, in particular, in choosing
among technological options is the security of
generating returns large enough to cover sub-
sistence needs. As recent empirical studies of
peasant behavior indicate, safety-first criteria
Edgardo Moscardi is an economist with the International Center
for Wheat and Com, Mexico, and Alain de Janvry is an associate
professor of agricultural and resource economics. University of
California. Berkeley.
Giannini Foundation Paper No. 455. The authors are indebted
to Donald Winkelmann and George M. Kuznets for helpful sug-
gestions and to the International Center for Corn and Wheat for
financial assistance.
Downloaded from http://ajae.oxfordjournals.org/ at Penn State University (Paterno Lib) on May 9, 2016
tend to be followed whenever the satisfaction
of basic needs may be at risk (Scandizzo and
Dillon).
Assuming that the safety-first model holds,
the degree of risk a version manifested by indi-
vidual peasants can be derived from observed
behavior. Given a production technology, the
risk associated with production, and market
conditions, the observed level of factor use
reveals the underlying degree of risk aversion.
In this fashion, attitudes toward risk can be
measured for relatively large samples of peas-
ants. Explanations for differential degrees of
risk aversion among peasants can then be
sought by relating the measures of risk aver-
sion obtained to a number of variables that
characterize the peasant household, its in-
come-generating opportunities, and its posi-
tion in the political economy.
This indirect approach to the measurement
and explanation of risk aversion is introduced
as an alternative to the direct approach devel-
oped by von Neumann and Morgenstern. In
this direct approach the subject is asked to
make decisions in reaction to a large number
of randomly arranged hypothetical bets and
insurance schemes. This approach has serious
difficulties resulting from the fact that the sub-
jects have different degrees of utility or disutil-
ity for gambling (the very method used to re-
veal their preferences) and that the concepts
of probability are by no means intuitively ob-
vious (Edwards). In addition, the method is
very time consuming to administer (Lin,
Dean, and Moore). As a result, the measure-
ments of risk aversion thus obtained have
been few, and attempts at relating these mea-
Moscardi and de Janvry Peasants' Attitudes Toward Risk 711

surements to explanatory variables have been Pf, E(y) = Pi

unsuccessful (Halter and Beringer, Officer (2) Xi 1 - eKeS) ,
and Halter) or only partially successful (Scan-
where f, is the elasticity of production of the
dizzo and Dillon).
ith input. In equation (2), the left-hand side is
The indirect approach used here is easy to
the expected value of the marginal productiv-
handle empirically and thus makes it possible
ity of the ith input. On the right-hand side, the
to manipulate large samples of peasants. The
price of the ith input is compounded by a risk
results, however, are fully conditional on how
factor that is a function of the socioeconomic
well the model specified describes peasant be-
characteristics of the peasant household.
havior. The validity of the results depends
Assuming that this model correctly specifies
upon careful screening of the observations so
the peasant's decision-making process, the
t~at all discrepancies between actual and pre-
value of the risk-aversion parameter K can be

Downloaded from http://ajae.oxfordjournals.org/ at Penn State University (Paterno Lib) on May 9, 2016
dicted behavior that are not due to risk in
deduced from the observed levels of product
production are accounted for by the model.
and inputs by solving equation (2):

AUocative Efficiency under Safety First

(3) K(S) = -Y 1 -
8\
PiX;)
Pf,/.ty·
Equation (3) provides a measure of risk a ver-
Alternative specifications of safety-first rules sion that can easily be derived for each peas-
have been given by Roy, Telser, and Kataoka. ~nt from knowledge of the production func-
Following Kataoka, maximize d subject to non, the coefficient of variation of yield, prod-
Pt(r :S d) :S a, where d is the subsistence or uct and factor prices, and observed levels of
disaster net income level, r is the random net factor use.
income, and a is the accepted probability of Since risk aversion is measured as a residual
disaster (presumably low). This last variable is ~rom the behavioral equation (2), it tends to
postulated to depend upon a vector S of vari- include other sources of discrepancy between
ables that represent the socioeconomic char- optimum and actual resource allocation such
acteristics of the peasant household: a = as, for example, imperfect market and ag-
a(S). Assuming the mean /.t and standard de- ronomic information, restricted availability of
viation 0" of r to be known, a certainty equiva- fi~ancial capital. and inputs, and high opportu-
lent .to. t.he above model can be derived by mty cost of family labor. In order for the mea-
maxmnzing the upper bound of the disaster sured K to be a pure measure of risk a version
level given by Chebychev's inequality (Pyle the data have to be carefully screened t~
arid Turnovsky). Then the model becomes eliminate observations where such constraints
(I) max V(,.", 0") = /.t - KO" for K = K(S), may be effective.
where K is the marginal rate of substitution
between expected net income and risk, i.e.,
the measure of risk aversion suggested by Measurements of Risk Aversion
Magnusson. Like a, K is a function of the
peasant household characteristics S. The data used are derived from the Puebla
Assume that the randomness of net income Project in Mexico (International Center for
derives from yield uncertainty. Assume also Wheat and Com). In this well-advertised rural
that the relationship between inputs (vector X) ~evelop~en~ pr?ject, a package of technolog-
and yield (Y) is represented by a generalized ical and institutional practices designed to in-
power production function (de Janvry 1972a crease com yields was developed and dis-
b) , seminated among peasants. The package in-
cluded technical information about fertilizer
dose~, ti.me.of application, and plant density,
plus institutional arrangements to facilitate ac-
For a given production function, a given cess to credit and fertilizer.
c?efficient of variation of yield (e = O"Y//.ty), The agronomic information needed to esti-
given factor prices (Pi), and a given product mate the production function for this new
price (P), the preference order (1) can be technological package was obtained from the
maximized with respect to the input levels. field experiments of corn fertilization carried
The resulting first-order conditions are out by the project agronomists between 1967
712 November 1977
and 1971. The data consist of 1,142 observa-
tions from twenty-five trials conducted in one
of the production systems of the project
known as Deep Soils of the Popocatepetl.
Each basic observation consists of informa-
tion on yield (Y) in kilograms per hectare, ni-
trogen doses (N) in kilograms per hectare,
phosphorus doses (PO) in kilograms per hec-
tare, soil organic matter (M) in percentage,
soil phosphorus content (P) in kilograms of
P20S per hectare, and soil p H (PH) in units.
Due to the existence of high correlations
among the exogenous variables, the param-
eters of the generalized power production
function are estimated using ridge regression
(Hoerl and Kennard). The results are log Y =
0.98 + 0.34 log N - O.OIM log N + 0.04 log
PO - 0 Plog PO + 0.01 log M + 0.32 log P +
1.71 log PH; R2 = 0.6, ridge parameter » 0.2.
The information about fertilizer levels actually
used by farmers, as well as location and socio-
economic characteristics of peasant house-
holds, was obtained from a random survey
conducted in 1971. From this survey, a sample
of farm households was selected in order to
meet two requirements that would insure that
the decision model postulated applies. These
requirements are that the farmers knew about
fertilizer, had used it in the past, and culti-
vated maize as their major agricultural activity
and had no effective family labor constraint in
the sense that the difference between available
family working time and time allocated to off-
farm, income-generating activities was greater
than the labor requirements to grow com using
the economically optimum level of fertilizers.
Forty-five of the fifty-five farm households in
the survey were retained on the basis of these
criteria.
Since nitrogen is agronomically the most
important input for increasing yields in the
Table 1. Economic Optimum, Farmers' Use of Fertilizer, and Risk-Aversion Measure, Puebla,
1971
Economic Optimum
Farmer
Identification N N
---------------
I 191 23
2 100 12
3 147 20
4 150 21
5 155 22
a Adjusted at the expansion path.
Amer. 1. Agr. Econ.
area and is also the largest component of vari-
able costs, its marginal productivity derived
from the farm experiments is used to calculate
the risk-aversion parameter K for each farm
household. This marginal productivity is mea-
sured for the particular soil conditions of each
peasant and for a level of phosphorus corre-
sponding, on the expansion path, to the ob-
served doses of nitrogen used.
The derived marginal productivity together
with the coefficient of variation of yield and
product and factor prices for 1971 provide a
value of K for each farm household using
equation (3). A sample of the results obtained
is shown in table 1. The estimated frequency
distribution of K obtained from its cumulative
distribution function using Schlaifer's fractile
rule is shown in figure 1. The results show a
distribution of risk aversion highly skewed
toward the risk averters and centered around
K = 1.12. This value is close to that estimated
by Scandizzo and Dillon for a similar popula-
tion of subsistence peasants in northeast
Brazil but following the direct approach of von
Neumann and Morgenstern.
Since Kataoka's safety-first rule implies
constrained optima for values of risk a version
greater than zero, the marginal rates of return
associated with diminishing degrees of risk
aversion can be calculated. The results are
shown in table 2. Clearly, the net benefit curve
becomes practically fiat for expenditures
above $600 per hectare and the marginal rate
of return drops drastically. If one thinks of net
benefits as returns for risk taking and defines a
risk premium as the percentage amount that a
farmer requires before exposing himself to a
variable income, such a premium is very high
for an average farmer (K being about 1), thus
discouraging nitrogen fertilization rates be-
yond some 60 kilograms per hectare.
Farmers' Use
Risk
Measure
Kilograms/Hectare ---------------
125 15 0.47
0 0 1.90
54 7 0.93
0 0 1.92
30 4 1.30
 Moscardi and de Janvry Peasants' Attitudes Toward Risk 713

hand, the ability to farm under these condi-

0.30 tions does not require a lot of experience and,
Mean = 1.12 on the other, opportunities to develop infor-
025
Variance = 0.38 mally new types of skills and to use them
i j' 0.20 profitably are not easily available. As table 3
.:>, shows, the average age of the household head
~ 0.15 is quite high: fifty years.
LL

0.10
Higher levels of education have generally
been associated positively with risk taking. In
0.05 the area under study, the average number of
years of schooling is, however, very low-2.4
0~-=-0.725::-:0:-:.5::::0--:0::-:.7::5:-:-LO~0;:-:'1~.-21-~=.-55:-:0~1.7'::5:-:-2.~OO-:--J- K years-indicating attendance at elementary

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school without graduating. Due to this low
Figure 1. Frequency distribution of the risk- level of education, the impact of schooling on
aversion measure K risk taking can be expected to be positive but
not of great importance.
Two opposing interpretations can be given
Determinants of Attitudes Toward Risk to the relationship between risk taking and
family size. One is that, the larger the size of
Three classes of variables are used to define the family, the higher the subsistence con-
the socioeconomic characteristics of the peas- sumption needs and, given a fixed amount of
ant households: the nature of the household, land, the lower the willingness of the farmer to
its income-generating opportunities, and its assume risks. In this case, family size reflects
access to public institutions. An explanation the consumption needs of children. Another
for the differential degree of risk aversion interpretation is that family size reflects the
among peasant households can be sought from labor capacity of the peasant household. A
these characteristics. larger family implies greater availability of
Age and years of schooling ofthe household labor on the farm, which is particularly impor-
head and family size are included in the first tant at harvest time when there is a labor
class of variables. It is generally assumed that, shortage in the region and a greater capacity
other factors being the same, older farmers to generate off-farm income. As a result, the
tend to be less prone to take risks than capacity of the farmer to assume risks in-
younger ones. This should be particularly true creases with family size. The data support this
in subsistence agriculture where age can second interpretation: most family members
hardly imply greater on-the-job experience are actually engaged in productive activities.
(which may be thought to be positively asso- A verage family size is 5.4 members with only
ciated with risk bearing), since, on the one 1.5 members below ten years of age.

Table 2. Marginal Rates of Return for Diminishing Degrees of Risk Aversion in Fertilizer Use,
Puebla, 1971

Fertilizer Doses Change Marginal

Risk- A version Variable Net Change in Net Rate of
(K) N P.O. Costs" Benefit in Costs Benefits Return (%)
Kilograms/ Hectare ------------- U.S. $/Hectare --------------
0 190 21 b 1.04 1.83
0.22 0.02 7
0.28 150 17 0.82 1.81
0.22 0.06 28
0.58 110 12 0.60 1.75
0.22 0.13 62
0.94 70 8 0.38 1.62
0.22 0.32 142
1.38 30 3 0.16 1.30
0.16 0.84 520
1.99 0 0 0 0.46
a Fertilizer. labor, and capital.
b Average risk-neutral point.
714 November 1977 Amer. J. Agr. Econ.

Table 3. Mean and Standard Deviation of Socioeconomic Variables for Farmers with Different
Attitudes Toward Risk, Puebla, 1971
Off- Farm Land
Family Income under Solidarity
Group Age Schooling Size (U.S. $) Control (Ha.) Group (%)

----- Years -----

Total sample (N = 45)
Mean 50.0 2.4 5.4 123 2.9 30
Standard deviation 15.0 1.9 2.7 288 3.8
Low risk (N, = 6)
Mean 4.3 3.2 5.0 163 3.9 66

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Standard deviation 10.0 2.1 2.8 183 1.9
Intermediate risk (N2 = 21)
Mean 48.0 2.8 6.4 135 2.9 14
Standard deviation 14.0 1.7 2.5 378 3.9
High risk (N3 = 18)
Mean 58.0 1.4 4.9 70 1.8 11
Standard deviation 13.0 1.4 3.2 182 1.6

The income-generating opportunities of the of off-farm income as a component of family

peasant household are represented by the total
amount of land under its control and the level
of off-farm income. Total land under control is
the amount of land cultivated by the peasant
independently of the type of land tenure. Ac-
cording to a benchmark survey conducted in
1967, some 40% of the farmers had a combined
private and -ejido holding, while 30% were
pure ejidatarios and 40% were pure private
small holders. Land tenure differences do not
have an impact on economic behavior. The
average land under control for the sample
under study is 2.9 hectares, including 0.15 hec-
tares under irrigation. The hypothesis here is
that having more land under control permits
the farmers to bear higher risks. This hypothe-
sis is consistent with both Pratt and Arrow's
formulation of decreasing absolute risk aver-
sion for increasing wealth as well as with the
recent findings of Wiens regarding peasant risk
aversion. Following the logic of safety first,
this results from the fact that the risk-aversion
constraint becomes less effective as income
rises beyond subsistence requirements. In ad-
dition, more land makes it possible to spread
out risks by cultivating more than one crop or
the same crop under different technologies;
also, more land often implies different plots at
various locations on different kinds of soils
and under different climatic conditions.
Off-farm income can be assumed to have an
important impact on risk taking. In the sample
under study, 65% of the households earned
off-farm income, generating some 40% of total
family income. This part-time agricultural sys-
tem is typical of subsistence agriculture in
Latin America (Barraclough). The importance
income increases as farm size is smaller, fam-
ily size larger, and agronomic conditions more
marginal. In the Puebla area, which is fairly
urbanized, off-farm earnings are obtained
from wages in domestic, commercial, and in-
dustrial employment in nearby cities. With
rather stable employment opportunities, the
hypothesis is that the higher the off-farm in-
come, the higher the capacity of farmers to
assume risks in agricultural production.
Only one variable is used to account for the
integration of the peasant with public insti-
tutions-membership in a "solidarity group."
The creation of such groups was induced
by the Puebla Project to allow peasants to
have access to credit not as individuals but
as groups of five to twenty members. In this
way transaction costs are reduced for both
farmers and banks; technical assistance by the
Puebla Project can be provided more effec-
tively; and many farmers who do not have
legal title to their land can thus obtain credit as
long as at least one member of the group has
legal title. Some 30% of the farmers in the
sample are members of solidarity groups.
What is not known is whether the farmers
joined the groups because they wanted to fol-
low the technological recommendations of the
Puebla Project or whether they were already
using high fertilizer doses but wanted to have
easier access to credit. If the latter condition
applies, there would be no relationship be-
tween risk taking and membership in a solidar-
ity group. If the former applies, as can gener-
ally be expected, a farmer in a solidarity group
is better able to sustain risks.
A discriminant analysis was conducted to
Moscardi and de Janvry
explore quantitatively the relation between
risk a version and the household characteris-
tics defined above. This multivariate tech-
nique is more adequate here than regression
analysis for two reasons. First, the interval of
variation of K is truncated between 0 and 2 for
the behavioral condition (1) to be satisfied with
a coefficient of variation of yield of 0.5. Sec-
ond, it is useful for the design of rural devel-
opment programs to classify peasants into
groups with similar attitudes toward risk and
identify the defining socioeconomic charac-
teristics of those groups.
The risk parameter K has been used to
classify peasants into three groups: low-risk (0
< K < 0.4), intermediate-risk (0.4:$ K:$ 1.2),
and high-risk aversion (1.2 < K < 2). The
general hypothesis that a systematic relation-
ship exists between attitude toward risk and
the socioeconomic characteristics of peasant
households, as well as the particular hypothe-
sis on each variable discussed above, is re-
jected or accepted to the extent that the dis-
criminant function estimated assigns the peas-
ant households to the same groups as does the
classification variable K. Table 3 shows the
mean and standard deviation of the socioeco-
nomic variables for the three groups defined in
terms of attitude toward risk. Particularly re-
-markable is the association between risk tak-
ing and off-farm income, land under control,
and membership in a solidarity group.
Table 4 makes it possible to compare the
classification obtained by discriminant analy-
sis with that established on the basis of risk
aversion. Of the total number of observations
assigned to .each group on the basis of risk
aversion, 83% remained in the risk-neutral
group, 86% in the low-risk group, and 82% in
the high-risk group. No reclassification oc-
curred between the extreme groups. This
analysis was repeated on a sample of thirty-
one peasant households in another area of the
Table 4. Households Classified According to Risk Aversion and Discriminant Analysis, Puebla,
1971
Discriminant Analysis Groups
Risk- A version Groups
1 5
2 o
3 o
Totalb 5 18
• Assigned by the classification variable K.
b Assigned by the estimated discriminant function.
Peasants' Attitudes Toward Risk 715
Puebla Project with results essentially similar
to those presented here (Moscardi).
For predictive purposes, a regression equa-
tion was run between risk a version and the
same socioeconomic variables characterizing
peasant households using a combined sample
of seventy-six cases from two regions. As can
be seen from table 5, the results also support
the hypothesis that the risk-bearing capacity
of peasants can be explained by their socio-
economic and structural characteristics. Par-
ticularly significant for that purpose are the
extent of land under control, off-farm income,
Downloaded from http://ajae.oxfordjournals.org/ at Penn State University (Paterno Lib) on May 9, 2016
and membership in a solidarity group.
Conclusions
Estimation of risk aversion for a relatively
large sample of farmers, following the indirect
method outlined above, shows that risk aver-
sion is indeed responsible for substantial dif-
ferences between the demand for fertilizer
without risk and actual demand. Risk pre-
miums are high, discouraging the use of high
rates of fertilizer under safety-first behavior.
Knowledge of the value and distribution of
K is important for the construction of models
of peasant behavior and of aggregate supply
response. Particularly interesting is the fact
that, following the much less data-demanding
indirect method, results similar to those ob-
tained by direct use of the von Neumann-
Morgenstern technique have been obtained.
Beyond random discrepancies, it is possible
to establish a systematic relationship between
risk aversion and a number of socioeconomic
variables that characterize peasant house-
holds, their access to income-generating op-
portunities, and their relation to public institu-
tions. Knowledge of attitude toward risk for
particular categories of peasants defined by
these socioeconomic variables makes it possi-
2 3 Total"
I o 6
15 6 21
2 16 18
22 45
716 November 1977 Amer. J. Agr. Econ.

Table 5. Regression Estimates: Risk Aversion and Managerial Behavior." J. Farm Econ. 42
(1960): 118-32.
versus Socioeconomic and Structural Charac-
Hoerl, A. E., and R. W. Kennard. "Ridge Regression:
teristics Biased Estimation for N onorthogonal Problems."
Technometrics 12 (1970):55-67.
Regression

Variables in Logs Coefficient t-value International Center for Wheat and Corn. The Puebla
Project: Seven Years of Experience, 1967-1973. El
Intercept 2.079950 1.9248 Batan, Mexico, 1974.
Z2
Z, = schooling
= age -0.121252
0.632502 -0.4496
1.0728 Econometrica
Kataoka, S. .. A 31Stochastic
(1963):181-96.
Programming Model."
Z3 = family size -0.011686 -0.0424 Lin, W., G. Dean, and C. Moore ... An Empirical Test of

Z5 = off-farm income -0.091616 -2.0901 Utility vs. Profit Maximization in Agricultural Pro-

Z6 = land under control -0.477450 -3.0141
Z7 = solidarity group -0.365100 -2.3103
R2 = 0.37
F = 6.78
ble, in turn, to determine packages of techno-
logical and institutional practices optimally tai-
lored to peasants' economic behavior. Such
packages should greatly enhance the chances
of success of rural development programs.
[Received January 1977; revision accepted
May 1977.]
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