Farm-Level Risk-Balancing Behavior and the Role of Latent Heterogeneity

Tamirat S. Aderajew, Xiaoxue Du, Joost Pennings, Andres Trujillo-Barrera*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

2 Citations (Web of Science)


The risk-balancing hypothesis (RBH) suggests that farms will take less business risk as their
financial risk increases, but existing literature provides empirical evidence that the RBH might
be invalid under certain circumstances. We present a unified model that explains the conditions
under which the RBH holds or is invalidated by recognizing the role of latent heterogeneity among
farms. We generalize the RBH idea and trace the source of credit risk back to latent heterogeneity
among farms. We then apply recent literature to longitudinal data from a panel of Dutch farms
and classify segments using a finite mixture regression fixed-effects model and find that the RBH
may not apply to all groups in the same way.
Original languageEnglish
Pages (from-to)265-281
Number of pages17
JournalJournal of Agricultural and Resource Economics
Issue number2
Publication statusPublished - May 2020

JEL classifications

  • q00 - "Agricultural and Natural Resource Economics; Environmental and Ecological Economics: General"
  • m00 - "Business Administration and Business Economics; Marketing; Accounting: General"
  • g00 - Financial Economics: General
  • g02 - Behavioral Finance: Underlying Principles


  • farm business
  • finite mixture regression fixed-effects model
  • risk-balancing hypothesis

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