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Abstract
Farm production is surrounded by uncertainty. Between planting and harvesting many
random events such as plagues, droughts and sudden changes in commodity prices, may affect
farmers’ revenues. Agriculture in arid and semi-arid zones is highly dependent on rainfall, which
introduces an additional risk during droughts. This research posits the hypothesis that water
management in agriculture during droughts strongly depends on the risks farmers face and on
their expectations, based on past drought experiences. Specifically, it is hypothesized that
farmers’ participation in the water spot or water rights markets are a function of their individual
levels of risk, the variability of water supply and irrigation efficiency, the type of crops grown
and the severity and frequency of past droughts. To evaluate these hypotheses, data were
collected from a sample of 333 farmers in the Limarí River Valley in Northern Chile, during the
unprecedented drought that took place from 1994 through 1997.