WEALTH, WEATHER RISK AND THE COMPOSITION AND PROFITABILITY OF AGRICULTURAL INVESTMENTS

In this paper we utilise panel data from rural India on investments, wealth and rainfall to examine how the composition of productive and non-productive asset holdings varies across farmers with different levels of total wealth and across farmers facing different degrees of weather risk. We measure the riskiness of farmers' investment portfolios in terms of their sensitivity to weather variation, implement a test of the central feature of an investment equilibrium characterised by risk-averse agents and estimate how the influence of exogenous weather risk on portfolio riskiness and on farm profitability varies with total wealth. In Section I of the paper, we set out a framework for exploring the determination of the portfolio of agricultural investments under risk that explicitly incorporates the first two moments of the distribution of weather outcomes and farmers' differing ex post abilities to deal with weather risk. Section II contains a description of the data and a discussion of measurement issues, with particular attention to the measurement of weather, and a test of the relative importance of weather variability and other sources of income risk in actually influencing consumption. In Section III, the profit function estimates are presented and tests of scale economies, of the applicability of the two-moment distributional assumption, and of the risk-aversion investment equilibrium are reported. In the next section, estimates of the influence of weather risk and wealth on the riskiness and profitability of farmers' asset portfolios are estimated. -from Authors