No Risk, No Reward: Does Risk Attitude of Smallholder Farmers Affect Profit Efficiency? Evidence From Ghana

Abstract

ABSTRACT This study examines the impact of risk attitudes on the profit efficiency of smallholder agricultural enterprises. Using output and input quantity and price data from smallholder maize farmers in Ghana, this study employs a three‐stage feasible generalized least square (3SFGLS) framework to determine farmers' risk attitude; data envelopment analysis to estimate farmers' profit efficiency; and the endogenous switching regression (ESR) model to measure the impact of risk attitude on profit efficiency. Our analysis leads to three key findings. First, smallholder maize farmers in our sample are risk‐loving, and their socioeconomic characteristics and some institutional factors influence their risk attitudes. Second, farmers are generally inefficient, with an average profit efficiency score of 53.3%, indicating potential to increase their profits. Third, our analysis suggest that risk‐averse farmers could improve their profit efficiency by 7% if they took more productive risks.