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Risk preferences and management have been widely addressed both analytically
and numerically in the economic literature. Many stakeholders such as farmers or
firms are typically risk-averse. The more significant the variability they experience
in their profits or service supply, the more willing they will be to adopt measures
that reduce risks.
In the face of climate variability, vulnerable farmers employ ex-ante (forecastbased) strategies, to protect against the possibility of catastrophic loss in the event
of a climatic shock. Farmers’ precautionary strategies include the following:
1. Selection of a portfolio including less risky but less profitable crops.
2. Overuse of fertilizers.
3. Diversifying income sources.
4. Avoiding investment in production assets and technology.
Arguments have been made that if farmers can trade away part of the risks on their
farm at an acceptable cost, the expected utility of the farmer will increase and this
provides another incentive direction—development of risk sharing mechanisms like
insurance or crop share arrangements when Nexus practice adoption increases risk
exposure.
Although sharing risks can increase utility, individuals are not likely to share all
risks. Factors that may influence this decision include the following:
1. An individual’s degree of risk aversion.
2. The costs involved in risk sharing.
3. The relative size of a risk.
4. The correlation of the risk with other risks.
5. Other sources of indemnity.
6. An individual’s perception of the nature of risk.
7. An individual’s income and wealth.
5.3.5 Public–Private Goods, Incentives, and Roles
Some strategic responses to Nexus issues involve adaptation strategies that occur
autonomously by private individuals and through planned public actions.
McCarl (2015) presents a list of possible adaptation categories in a climate
change adaptation context with an indication of whether the actions will be public
or private. Individuals serving their personal interests take private actions. For
example, altering crop, livestock mix, or modifying irrigation practices are primarily exercised by private individuals who manage the land. However, other strategies
are not feasible or desirable for implementation by individuals (called public goods)
which, in turn, bring in a public role. Public entities may alter policy, provide incentives, provide information, develop certain classes of technology, or build infrastructure. Examples of such public actions include:
B. A. McCarl and Y. Yang
Risk preferences and management have been widely addressed both analytically
and numerically in the economic literature. Many stakeholders such as farmers or
firms are typically risk-averse. The more significant the variability they experience
in their profits or service supply, the more willing they will be to adopt measures
that reduce risks.
In the face of climate variability, vulnerable farmers employ ex-ante (forecastbased) strategies, to protect against the possibility of catastrophic loss in the event
of a climatic shock. Farmers’ precautionary strategies include the following:
1. Selection of a portfolio including less risky but less profitable crops.
2. Overuse of fertilizers.
3. Diversifying income sources.
4. Avoiding investment in production assets and technology.
Arguments have been made that if farmers can trade away part of the risks on their
farm at an acceptable cost, the expected utility of the farmer will increase and this
provides another incentive direction—development of risk sharing mechanisms like
insurance or crop share arrangements when Nexus practice adoption increases risk
exposure.
Although sharing risks can increase utility, individuals are not likely to share all
risks. Factors that may influence this decision include the following:
1. An individual’s degree of risk aversion.
2. The costs involved in risk sharing.
3. The relative size of a risk.
4. The correlation of the risk with other risks.
5. Other sources of indemnity.
6. An individual’s perception of the nature of risk.
7. An individual’s income and wealth.
5.3.5 Public–Private Goods, Incentives, and Roles
Some strategic responses to Nexus issues involve adaptation strategies that occur
autonomously by private individuals and through planned public actions.
McCarl (2015) presents a list of possible adaptation categories in a climate
change adaptation context with an indication of whether the actions will be public
or private. Individuals serving their personal interests take private actions. For
example, altering crop, livestock mix, or modifying irrigation practices are primarily exercised by private individuals who manage the land. However, other strategies
are not feasible or desirable for implementation by individuals (called public goods)
which, in turn, bring in a public role. Public entities may alter policy, provide incentives, provide information, develop certain classes of technology, or build infrastructure. Examples of such public actions include:
B. A. McCarl and Y. Yang