Economics - General

Risk Preferences and Technology Adoption in China

Development economists have long sought the answers as to why new innovations do or do not get implemented in developing countries. Giliches (1957) found that hybrid corn adoption has an S-shaped function over time. Other studies have found that an individual’s social network is the primary determinant of technology adoption. If your friends try out a new technology and it works, you will be more likely to hear about this advance if you have a large social network. Other economists blame credit constraints for the slow adoption of many farming technologies. A large up-front cost of some fertilizer or new seeds may be prohibitive, even if there is a high payback rate in terms of crop yield. Finally, it is possible that the “new and improved” technology may not be better. A pesticide developed in the West may work on American or European pests but may prove impotent against different other farm threats in other countries.

A paper by Elaine Liu, however, argues that there is another driving force which may explain technology adoption: risk preferences. To test this, Liu surveys Bt cotton adoption of farmers in the Henan, Shandong, Hebei and Anhui provinces in China. Bt cotton is slightly more expensive that regular cotton seeds, but farmers who use these new seeds spray 82% less pesticides than with the original seeds.

To test for risk aversion, Liu employs a Holt and Laury (2002) methodology but uses prospect theory to fit parameters of the individual’s utility functions. This allows individuals to be loss averse and also to use nonlinear probability weighting.

After controlling for various covariates, Liu finds the following results.

  • Individuals with higher levels of risk aversion adopt Bt cotton later.
  • Individuals with higher levels of risk aversion continue using higher levels of pesticide even though less pesticide is needed when Bt cotton is used compared to traditional cotton seeds.
  • Farmers with more education were not found to adopt Bt cotton earlier, but once they did begin using the Bt seeds, they wisely used less pesticide.

Although Liu does not mention this, prudence may play a factor in these technology adoption decisions. Taking a sure loss from the higher price of Bt cotton may not outweigh the gain from decreasing the probability of crop loss.

By 2006, the adoption of Bt cotton was nearly 100% and it seems that Chinese farmers are reaping the rewards of this new technology. Once the farmers understood better the benefits of the new seed, risk decreased and farmers were more likely to adopt the new Bt cotton technology.

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