Risk Aversion and Diversification Strategies

Diversifying agricultural assets and income sources is a critical strategy employed by the poor to meet their critical needs, mitigate risks and respond to shocks. Relative to non-poor households, poor households are more likely to face constraints to asset ownership, which may impact their ability to improve their welfare. This paper uses primary data collected from the Guatemalan Highlands, including an experiment to elicit risk preferences, to describe the association between risk preferences and a household's agricultural assets and income diversification using a model that controls for fixed effects at the community level. The findings suggest limited evidence that higher risk aversion is positively related to asset ownership. While one might expect risk averse individuals to diversify their household's sources of income, the results from this study suggest only limited evidence of this occurring in Highland Guatemala. (c) 2019 John Wiley & Sons, Ltd.