A Behavioural Economic Analysis of Agricultural Investment Decisions in Uganda

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Farmers in developing countries operate in extraordinarily hazardous environments. Policies that aim to increase agricultural productivity in such environments - policies on agricultural lending, research and extension, rural infrastructure, crop insurance, and so forth - need to take into account how farmers take agricultural investment decisions. However, crucial elements of their decision-making habits that relate to risky choices remain ill-understood. Here we propose to use behavioural economic research methods to advance our understanding in a number of important ways.The research we propose here is new, and has potentially far-reaching implications for understanding the behavioural constraints on inclusive agricultural growth in hazardous environments, and thus for an effective policy response. In order to demonstrate this potential we have selected a case study country, Uganda, where (a) such growth due to remarkable farmer investment behaviour has been achieved, and (b) despite this, unrealised potential for productivity growth still characterises most of the agricultural sector, related to low adoption rates of new technologies, 'thin' and isolated rural markets, the failure of farmer cooperatives, among many other factors.In order to elucidate the motivation of farmers' investment behaviour, we will use economic experiments, in which participants respond to real monetary incentives. The use of economic experiments is increasing in development economics; both applicants are well-versed in their use in a development context, as are the institutions at which they are based (the School of International Development and the Centre for the Behavioural and Experimental Social Sciences (CBESS) at the University of East Anglia). The experiments proposed here contain a number of novel design features, which will be piloted in order to ensure that participants understand the instructions.In the experiments, participants are asked to make choices from among lotteries; the ones they choose are implemented with the use of a random device (e.g. a bag with coloured balls), after which earnings are calculated and paid out. Probabilities and possible outcomes of the lotteries are systematically varied, in order to measure whether certain risks tend to be exaggerated (or alternatively, downplayed) in participants' minds. Several variants will be implemented. First, in contrast to the standard approach where money can only be earned (not lost), we would hand over money for use in the experiments several weeks before (possibly in a bank account that subjects cannot access before game day), so that we observe risky choice behaviour that relates to losses of money that subjects have come to regard as their own. Second, in order to test whether a probability threshold exists below which risks are ignored, we would offer subjects control over the amount of risk they take through allowing them (at a price) to manipulate the probabilities of outcomes. Third, to study the influence of social interaction on risky choice behaviour, random pairs of participants are formed whose earnings are pooled and participants are asked to determine how the total earnings should be redistributed.We will also investigate whether farmers are biased when they consider making an investment. To do so, we have in mind to use existing data for the research area about the distribution of yields given soil type, agricultural inputs, and so forth, which can be converted into easily understood probabilistic statements ("yield will exceed X per acre, Y out of Z times"). We would describe to respondents a number of scenarios, and invite them to come up with such a statement, knowing that their reward will be greater, the more accurate the statement is. This allows us to detect any bias in decision-making that can then be related to the data on actual investment behaviour obtained in a socio-economic survey that we conduct after the experiments.