Theory of Agricultural Household Behaviour Under Risk and Uncertainty in Sub-Saharan Africa: Evidence from Nigeria

This study develops and tests a theoretical model of agricultural household behaviour under risk and uncertainty, contributing an original theoretical extension to existing agricultural household models that inadequately represents the risk management behaviour of smallholder farmers in Sub-Saharan African contexts. Existing agricultural household models assume complete markets and expected utility maximisation that fail to capture the informal risk-coping strategies, recursive decision-making under uncertainty, and non-expected utility preferences observed in Nigerian smallholder farming communities. This study proposes an extended agricultural household model incorporating non-expected utility theory, specifically rank-dependent utility, sequential crop portfolio decision-making under partial information revelation, and informal insurance market equilibrium. The theoretical model generates novel testable predictions about how risk preferences, insurance access, and information arrival affect crop portfolio composition, input intensity, and market participation decisions. Empirical testing uses three waves of the LSMS-ISA Nigeria panel data augmented with original household-level risk elicitation experiments conducted with 400 farming households across six states. Structural model estimation uses simulated method of moments. Findings provide strong support for rank-dependent rather than expected utility preferences in crop portfolio choices. Informal insurance network participation significantly reduces productive risk-coping behaviour such as input underapplication. The study contributes an original theoretical framework for African smallholder risk behaviour and recommends formal insurance development as a complement to extension for productivity improvement.

Keywords: agricultural household theory, risk and uncertainty, rank-dependent utility, Nigeria, smallholder behaviour.