Experimental insights on the investment behavior of small-scale coffee farmers in central Uganda under risk and uncertainty

• Published in: Journal of behavioral and experimental economics 2018-08, Vol.75, p.31-44
• Main Authors: Ihli, Hanna Julia, Gassner, Anja, Musshoff, Oliver
• Format: Article
• Language: English
• Subjects: Behavioral economics; Decision-making; Investment choice; Net present value approach; Price floor; Real options approach
• ISSN: 2214-8043; 2214-8051
• DOI: 10.1016/j.socec.2018.04.011

•The ROA more accurately predicts the investment behavior of farmers than the NPV.•The ROA and the NPV do not exactly predict farmers’ investment behavior.•Investment behavior does not differ with respect to the presence of a price floor.•Treatment order affects farmers’ investment behavior.•Demographic and socio-economic variables affect the investment behavior. In this study, we investigate the investment behavior of small-scale coffee farmers in central Uganda in an experimental setting. We consider a situation in which farmers are asked to make an investment under uncertainty and analyze whether and to what extent the Real Options Approach can predict the investment behavior of farmers and whether these predictions are better than those derived from the Net Present Value Approach. We also investigate whether the presence of a price floor has an effect on farmers’ investment behavior. Our results suggest that the Real Options Approach more accurately predicts the decision-making behavior of farmers than the Net Present Value Approach. However, the results also show that neither of the approaches entirely explains the observed investment behavior. Specifically, the presence of a price floor does not significantly affect the investment behavior. The latter is, however, significantly determined by the order in which treatments with and without price floor are introduced, alongside various demographic and socio-economic characteristics.