Smallholder farmers' risk management and innovation strategies and their impacts on poverty and resilience

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In the Horn of Africa, food insecurity, low agricultural productivity and poverty continue to persist, as illustrated by the recent food crisis in the region. Poor asset endowments, market failures, and weak institutions prevent smallholder farmers from investing in efficient land use strategies, keeping them trapped in poverty. Numerous risk factors, especially climate variability, which is expected to increase further with climate change, and increased price volatility as observed during recent years will constrain farmers` possibilities to enhance agricultural productivity and escape from poverty even more in the future. In response to their uncertain environment, smallholder farmers apply various diversification strategies to minimize the downside risk of falling into a state of destitution, encompassing crop and livestock related diversification as well as off-farm activities. The effectiveness of diversification to reduce overall income risk depends on the variance and covariance of returns from the different income sources. However, diversification typically involves a trade-off between risk reduction and the amount of income that farmers and livestock keepers are able to earn. The adoption of agricultural innovations in crop and livestock production would likely lead to productivity and welfare increases; however, smallholders are often unable to adopt them because of the capital requirements and risks involved and, hence, they remain trapped in poverty. Using Ethiopia, the largest country in the Horn of Africa, as an example, the objective of the proposed research is to identify the constraints to the adoption of major agricultural innovations by smallholder farmers. Hereby, farmers’ risk exposure, risk preferences, and the role of social networks, including informal financial institutions, will be particular foci of the analysis. Moreover, the welfare impact of these innovations at the household level will be quantified. The proposed project will expand the research frontier in the analysis of technology adoption under risk and is expected to considerably improve the explanatory power of technology adoption models in poor and risky agrarian settings, contributing to more effective policy design. Furthermore, the project will advance social science research methods by developing and testing innovative hypothetical and non-hypothetical methods to empirically elicit farmers’ risk preferences, which are hypothesized to be important determinants of technology adoption under risk.