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

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

doi:10.22004/ag.econ.302454

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 journal › Article › Academic › peer-review

Abstract

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 language	English
Pages (from-to)	265-281
Number of pages	17
Journal	Journal of Agricultural and Resource Economics
Volume	45
Issue number	2
DOIs	https://doi.org/10.22004/ag.econ.302454
Publication status	Published - 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

Keywords

farm business
finite mixture regression fixed-effects model
risk-balancing hypothesis
CHOICE
MARKET
GROUPED PATTERNS
PANEL-DATA MODELS

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Cite this

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abstract = "The risk-balancing hypothesis (RBH) suggests that farms will take less business risk as theirfinancial risk increases, but existing literature provides empirical evidence that the RBH mightbe invalid under certain circumstances. We present a unified model that explains the conditionsunder which the RBH holds or is invalidated by recognizing the role of latent heterogeneity amongfarms. We generalize the RBH idea and trace the source of credit risk back to latent heterogeneityamong farms. We then apply recent literature to longitudinal data from a panel of Dutch farmsand classify segments using a finite mixture regression fixed-effects model and find that the RBHmay not apply to all groups in the same way.",

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author = "Aderajew, {Tamirat S.} and Xiaoxue Du and Joost Pennings and Andres Trujillo-Barrera",

note = "data source: co-authors",

year = "2020",

month = may,

doi = "10.22004/ag.econ.302454",

language = "English",

volume = "45",

pages = "265--281",

journal = "Journal of Agricultural and Resource Economics",

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publisher = "Western Agricultural Economics Association",

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AU - Aderajew, Tamirat S.

AU - Du, Xiaoxue

AU - Pennings, Joost

AU - Trujillo-Barrera, Andres

N1 - data source: co-authors

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AB - The risk-balancing hypothesis (RBH) suggests that farms will take less business risk as theirfinancial risk increases, but existing literature provides empirical evidence that the RBH mightbe invalid under certain circumstances. We present a unified model that explains the conditionsunder which the RBH holds or is invalidated by recognizing the role of latent heterogeneity amongfarms. We generalize the RBH idea and trace the source of credit risk back to latent heterogeneityamong farms. We then apply recent literature to longitudinal data from a panel of Dutch farmsand classify segments using a finite mixture regression fixed-effects model and find that the RBHmay not apply to all groups in the same way.

KW - farm business

KW - finite mixture regression fixed-effects model

KW - risk-balancing hypothesis

KW - CHOICE

KW - MARKET

KW - GROUPED PATTERNS

KW - PANEL-DATA MODELS

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DO - 10.22004/ag.econ.302454

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EP - 281

JO - Journal of Agricultural and Resource Economics

JF - Journal of Agricultural and Resource Economics

IS - 2

ER -

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

Abstract

JEL classifications

Keywords

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