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