What is it about?
In this study, we find the pricing of agricultural loans is significantly more important for production efficiency in Agriculture in relation to loan amounts. In the presence of information on loan pricing, we find loan amounts do not have any significant impact on farmers' efficiency. This is not to say we find capital is not important. Rather, we find capital amounts matter for efficiency only in so far as they fall short of the optimal amounts farmers need for productivity spending.
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Why is it important?
Agricultural programs at times focus on providing farmers with capital grants (within this context, capital grants are not the same as farmer subsidies) as opposed to agricultural loans. Our empirical results indicate, consistent with findings in some other studies, that capital grants are ineffective for generating productivity gains in agriculture. This is the case because in the absence of a minimum target return implied by loan interest rates, farmers that receive capital grants do not have the same incentives as farmers that receive loans.
Perspectives
In the financial economics literature, under certain assumptions that tend to hold up - more wealth is better than less wealth (non-satiation with respect to wealth), we do not need to know an investor's wealth in order to characterize the investor's behavior so long as we have information on the return and risk properties of the investors' portfolio. This paper provides empirical support for this convention in financial economics that an understanding of the return and risk profile of investors is sufficient to characterize investors' risk profiles or preferences. In so far as terminology is concerned, relative risk aversion focuses on an understanding of risk and return profiles of investments, while absolute risk aversion focuses on an understanding of the effects of investors' wealth on investment decisions.
Dr Oghenovo A Obrimah
Fisk University
Read the Original
This page is a summary of: The Effects of Relative or Absolute Risk Aversion on Production Efficiency in Agriculture: Evidence from the 'Bread Basket' of Nigeria, SSRN Electronic Journal, January 2014, Elsevier,
DOI: 10.2139/ssrn.2486431.
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