Risk Preferences and the Poverty Trap: A Look at Technology Uptake amongst Smallholder Farmers in the Matzikama Municipality

9 January 2018
Publication Type: Working Paper
JEL Code: D81, Q10, Q12

A number of studies suggest the risk preference of low income individuals can result in behaviour that create conditions of sub optimal investment and thus persistent poverty. In this paper, we carry out a study with small-scale farmers in the Matzikama Municipality of the Western Cape, South Africa. We investigate how risk preference affect technology investment amongst small-scale farmers in developing countries. We compare the natural and technological adaptive responses of farmers that are rooted in choice of crop cultivated by looking at the uptake of naturally ‘drought resistant crops’ and technological modified ‘improved seeds’. We find no effect of risk aversion or loss aversion on these option. We nonetheless find that the farmers do not effectively weigh probabilities and the weighting of probabilities in turn affects the uptake drought resistant crops. Our results on the effects of income are to some degree consistent with the poverty trap hypothesis. We find that low incomes have dampening effects on the uptake of resilient crop types both in the form of naturally ‘drought resistant crops’ and technological modified ‘improved seeds’. This indicates that the poor have limited prospect because they are not taking up both more naturally and technologically advanced crops.

Series title: Working paper 725
1 January 2018
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