Risk management under climate change and its implication on technical efficiency: Evidence from Senegal

Abstract In the absence of well-functioning markets to manage climatic-related risks, farm households in low-income countries mostly rely on informal traditional risk hedging mechanisms to avoid, reduce exposure to risks and increase the resilience of production systems. The use of such risk management tools or strategies has consequences for input use, levels of investments, and allocation of scarce resources, and thus have implications for production efficiency. Using empirical data from a nationally representative farm household survey in Senegal, this study evaluated the impact of different risk management strategies employed by farm households on technical efficiency. The study employed a sample selection stochastic production frontier approach and a meta-frontier model. The findings of the study suggest that the use of ex-post risk management strategies is associated with higher technical efficiencies with respect to the meta-frontier compared to other risk management strategies. Households, employing only ex-ante risk management strategies were observed to be the least technically efficient compared to households not managing risks or employing ex-post using other risk management strategies. The findings also suggest that managing production risks using multiple strategies does not necessarily result in the highest technical efficiency gain compared to the use of single or isolated strategies. The findings underscore the need to evaluate the trade-offs and likely consequences of risk management approaches used by farm households to provide context-specific policy recommendations.