Accounting for risk and stability in technology adoption

Abstract

The reasons for sluggish adoption of long-run agricultural systems are not well understood. Researchers have identified risk and uneven cash flows as two likely culprits, yet the literature has done little to investigate their impacts simultaneously. We explore the unique influence of risk, risk preference, stability, and stability preferences on the adoption of long-run investments. We developed risk-stability-segregated expected utility (RSSEU) to disentangle risk from stability and then compute the impacts of risk, stability, and preferences over a range of values found in previous studies. Results clearly demonstrate that adoption decisions are influenced differentially by risk and stability. An unstable income can overwhelm the risk effect or visa versa, depending on a person's preferences for risk and stability. Disentangling risk and stability could be very important if economists are to understand how decisions are made. For example, we found that the impact of risk on individual behavior is very low when the expected income flow is unstable. In this case, policies that smooth expected income over time will be more effective than ones that reduce risk. In contrast, risky technologies with a stable income path are more appropriately addressed with instruments like insurance or facilitating futures markets.