Risk preferences and voluntary agri-environmental schemes: does risk aversion explain the uptake of the Rural Environment Protection Scheme?


Working Paper 48

Abstract

The lowering of trade barriers under the successive reforms of the pillar I of the Common Agricultural Policy, the opening of the commodity markets to an ever greater number of financial actors, and the uncertainty created by climate change, amplify both production risk and market risks for producers.

This is particularly true for Irish dairy farmers, as they are export-oriented and their grass-based production system is closely linked to the cycle of seasons. The Rural Environment Protection Scheme (REPS), part of the agri-environmental policies of pillar II, offers to farmers an opportunity to stabilise their income over a five-year period.

This paper estimates risk preferences with the model of Antle (Antle, 1987) in order to analyse the impact of risk aversion (relative risk premium) on the probability of joining REPS.

The results support the hypothesis that REPS is used as a risk management tool. This sheds light on the interaction between the reforms of pillar I and the ones of pillar II: further increases in risk could increase the uptake of voluntary agri-environmental policies, while the development of new risk management tools (revenue insurance, forward contracts, etc) could decrease it, as they could both become substitutes.

Xavier Vollenweider, Salvatore Di Falco and Cathal O’Donoghue