Endogenous Technology Adoption Under Production Risk: Theory and Application to Irrigation Technology

The main objective of this paper is to present a theoretical framework that conceptualizes technology adoption as a decision process involving information acquisition by farmers who face yield uncertainty and vary in their risk preferences. This is done by integrating the microeconomic foundations used to analyze production uncertainty at the farm level with the traditional technological adoption models. First we follow the approach of Antle (1987) based on higher-order moments of profit, which enables flexible estimation of the stochastic technology without ad hoc specification of risk preferences. Then individual risk preferences are derived, which are then used to explain farmer’s decision to adopt modern water saving technologies. The proposed model is applied to a randomly selected sample of 265 farms located in Crete, Greece. Results show that risk preferences affect the probability of adoption and provide evidence that farmers invest in new technologies as a means of hedging against input related production risk.