Farm-Level Risk-Balancing Behavior and the Role of Latent Heterogeneity

Tamirat S. Aderajew, X. Du, J.M.E. Pennings, A.A. Trujillo-Barrera*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review


The risk-balancing hypothesis (RBH) suggests that farms will take less business risk as their financial risk increases, but existing literature provides empirical evidence that the RBH might be invalid under certain circumstances. We present a unified model that explains the conditions under which the RBH holds or is invalidated by recognizing the role of latent heterogeneity among farms. We generalize the RBH idea and trace the source of credit risk back to latent heterogeneity among farms. We then apply recent literature to longitudinal data from a panel of Dutch farms and classify segments using a finite mixture regression fixed-effects model and find that the RBH may not apply to all groups in the same way.
Original languageEnglish
Pages (from-to)265-281
JournalJournal of Agricultural and Resource Economics
Issue number2
Publication statusPublished - May 2020

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