An experimental analysis of higher order risk preferences and cooperation behaviour of farmers from water-stressed regions of West Bengal and Maharashtra, India

  

Farming is inherently a water-intensive process, and the agricultural sector is one of the largest consumers of water in an economy. Consequently, variations in water availability significantly impact farm productivity and the livelihoods of those employed in the farming sector. In developing economies, where agriculture still accounts for a significant share of national incomes, lack of institutional and structural support further affects farmers' capability to handle risk. In this context, climate change induced water scarcity is of particular concern, becoming more frequent compared to other natural or anthropogenic stressors in Indian agriculture. Indian farmers, for example, regularly grapple with erratic rainfall patterns, increasing temperatures, prolonged drought, and high-intensity flooding events. The typical response has been to increase reliance on groundwater resources and depend on the government for periodic subsidies, minimum support prices and loan waivers. India lacks well-developed market-based institutions and instruments in comparison to the developed nations, which makes adapting to water scarcity much more challenging.

Further, persistent structural stagnation at the macroeconomic level has left farmers seeking to exit farming but with few alternative livelihood options. In such situations, farmers' ability to manage multiple risks emanating from natural, market-related and personal situations becomes key to their future survival. Farmers' risk preferences can influence their capabilities to handle risks, including their livelihood diversification strategies. Small farmers can reduce their marketing and farming risks through organizing in groups, and mitigate water scarcity through collectively managing public goods. However, when faced with risk, mistrust among farmers increases, thereby hindering cooperation. Farmers also differ in their asset endowments or returns they receive from a particular investment, which affects their strategies towards managing risks. The literature suggests that cooperation suffers in the presence of risks due to heterogenous conditions. Whether or not cooperation is weakened or lacking among climate stressed farmers is a crucial research question that has not yet been investigated.

Previous studies have focused mainly on measuring and interpreting the risk-averse attitudes of farmers. In contrast, none have explored the role of higher order risk preferences, specifically prudence and temperance, in influencing their critical decisions. Moreover, the relationship of higher order risk attitudes with livelihood diversification strategies and socio-demographic and economic variables has rarely been investigated. Similarly, cooperation among farmers facing multiple livelihood stressors, including droughts and other background risks associated with agriculture, has not been investigated sufficiently. Identifying the gap, my thesis employs lottery choice experiments, cooperation games, and surveys on farmers in rural India to address the following research questions:

1. What types of risk preferences do water-stressed farmers hold-whether risk averse, or risk seeking, prudent or imprudent, and temperate or intemperate? How do these risk preferences interact with each other, and what are their potential interpretations?

2. What are the key socio-economic, farming and water scarcity-related correlates of higher order risk preferences?

3. How do risk preferences influence farmers' livelihood diversification strategies? What are the effects of prudence and temperance on income proportions earned from various livelihood strategies?

4. How do socio-economic variables influence livelihood diversification of farm households?

5. How does water scarcity influence livelihood choices of farmers?

6. What level of cooperation is detected among the drought-affected farmers in the cotton belt of Maharashtra?

7. How do farmers contribute to private and public accounts, aimed at facilitating cooperation, when they differ in their initial endowments, final returns, and when there is a provision of borrowing?

8. How do socio-economic, demographic and farm-related features influence the level of cooperation in groups?

This thesis uses outcomes of lottery choice experiments and surveys data collected from 232 farmers from the water-stressed Nalhati II block in the Birbhum district of West Bengal to address research questions 1 to 5. Additionally, the thesis employs cooperation games on 150 farmers from the drought-affected Wardha and Yavatmal districts of Maharashtra to address questions 6 to 8.