WP2: Grasslands’ farmers’ decision-making

Prof. Dr. Robert Finger and Nicolas Alou

Agricultural Economics and Policy Group, ETH Zürich

Grasslands farming systems provide both private benefit to the farmers and ecosystem services to the public. Biodiversity, food production and risk management are key for the provision of both those private and public benefits. In fact, the increased probability of extreme weather events, such as droughts, creates higher pressure for risk management instruments to be implemented. These instruments can be of different types (i.e. formal, natural and social insurance) and they not only reduce the variability of income but also impact the biodiversity and the aggregate yields of grasslands. Therefore, understanding the relations within the portfolio of risk managing techniques is necessary to optimize both private and public welfare. For instance, the uptake of formal insurance will impact biodiversity in grasslands due to the link with natural insurance.

In WP2 we focus on farmers’ decision making and what portfolio/combination of risk management instruments maximizes both the farmers’ private benefit and public welfare. Three different tasks will add valuable insight to this goal:

  • Grasslands farmers’ optimal choice of natural insurance and more specifically plant species diversity under new climatic pressure from droughts (task 2.1)
  • Grasslands farmers’ formal insurance uptake depending on the type. Two different types considered: indemnity insurance and weather index insurance (task 2.2)
  • Introduction of public welfare, design of optimal insurance portfolio and potential public policy framework (task 2.3)

More in details:

In task 2.1 we model farmers’ behavior in terms of risk management instruments against increased climate pressure. Specifically, we derive natural insurance techniques (focus on plant species diversity) implementation level as a response to an increase in the frequency of extreme weather events. We study possible indirect spillover effects from droughts risks to plant species diversity. With input from WP1, a quantitative bio-economic simulation is designed using the results from both the model and a quantitative analysis to derive the optimal plant species diversity decision for grasslands farmers.

In task 2.2 we develop a theoretical framework for farmers’ potential formal insurance uptake and its implications for farmer decision making with respect to natural insurance. We consider two different formal insurance types: i) indemnity insurance, ii) weather index insurance. Building upon task 2.1, we especially investigate optimal plant diversity decisions for the different insurance schemes and whether natural and formal insurance are complements or substitutes.

In task 2.3, we integrate public welfare in our analysis. Building upon task 2.2., we consider both private and public benefits arising from farmer decisions towards both natural and formal insurance and their interdependencies. Combining theoretical analysis and   numerical simulation we investigate how to design a formal insurance that will maximize private farmers’ benefit through decreased risk exposure and improve public welfare through for instance increased species diversity. Finally, we also assess different policy options to achieve this outcome.