Special Issue 2, December 2018
Article Number: 09
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Weather Risk and Off-Farm Labor Supply of Smallholder Farm Households in Developing Countries

Gansonré, S.
Pages 517-529

Abstract—This article provides a theoretical basis for analyzing the importance of risk avoidance behavior in labor allocation
decisions among smallholder farm households in developing countries. Based on an explicit real option model, historical rainfall
information and a short panel data from rural Burkina Faso are used to test the prediction of the model. The results show that while
rainfall risk strongly affects all labor equations, rainfall shock affects only non-farm labor supply. While emphasizing the presence
of risk avoidance behavior, these results suggest that part of the discrepancy between the prediction of traditional approaches and
the actual behavior of smallholder farm households may be explained by the modeling of the decision-making process. On the other
hand, the results imply that inability to insure against rainfall risk pushes smallholder farmers into less profitable off-farm activities
which may create and perpetuate poverty.

Keywords—weather risk, off-farm labor, real option, count panel data