Staff Publications

Staff Publications

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    'Staff publications' is the digital repository of Wageningen University & Research

    'Staff publications' contains references to publications authored by Wageningen University staff from 1976 onward.

    Publications authored by the staff of the Research Institutes are available from 1995 onwards.

    Full text documents are added when available. The database is updated daily and currently holds about 240,000 items, of which 72,000 in open access.

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Record number 549293
Title Farm-Level Risk-Balancing Behaviour and the Role of Latent Heterogeneity
Author(s) Tamirat, Aderajew; Trujillo Barrera, A.A.; Pennings, J.M.E.
Event Agricultural & Applied Economics Association 2018 AAEA Annual Meeting, Washington, D.C., 2018-08-05/2018-08-07
Department(s) WASS
Marketing and Consumer Behaviour
Publication type Contribution in proceedings
Publication year 2018
Keyword(s) Risk-balancing behaviour - latent heterogeneity - mixture regression model - farm business - Expectation-Maximization (EM) algorithm
Abstract This study provides farm-level empirical support for the risk-balancing hypothesis using a longitudinal dataset from a panel of 1500 Dutch farms. Risk-balancing refers here to adjusting the level of financial risk in response to changes in business risk due to exogenous shocks, keeping the level of total farm risk constant or close to the optimal total farm risk. In empirical studies to date, the heterogeneity of risk-balancing farms has been neglected. In this paper, we explicitly account for latent heterogeneity using a latent mixture regression model. Using the iterative Expectation-Maximization (EM) algorithm, the model simultaneously identifies segments based on the influence of the selected explanatory variables and estimates the effects of these variables on farm risk-balancing behaviour for each identified segment. We find that profitability, risk, leverage, age, size, and diversification play an important role in driving farm risk-balancing behaviour. Interestingly, the heterogeneity at segment level appears to have been masked at aggregate farm-type level, notably the effects of leverage and total risk exposure. Assuming homogeneity in farms’ responses and estimating a pooled model or a priori classifying farms based on farm type yields a poor fit. The results provide new insights in the interdependence of financial and business risks, spark discussion about the linearity of farm risk reduction policies and total farm risk and underline the relevance of considering both observed and unobserved factors in devising relevant risk-management strategies.
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