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

Abstract. The use of modern irrigation technologies has been proposed as one of several possible solutions to the problem of water resource scarcity and environmental degra-dation in many agricultural areas around the world. The main objective of this paper is to present a theoretical framework that conceptualizes 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 ana-lyze 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 to hedge against input related production risk