How do the risk preferences of smallholder farmers affect the attractiveness of restoration activities? Evidence from forest and agricultural land in Rwanda

In 2011, the country of Rwanda made a commitment to restore the productivity of 2 million hectares of degraded forest and agricultural land. Agroforestry and improved woodlot management activities were proposed to restore the ecological and economic productivity of agricultural and forestland in Rwanda, but the activities have not been evaluated in terms of their financial profitability, profitability risk, or ecological impacts despite being significant factors that influence the adoption decisions of smallholder landowners who occupy the majority of land in the country. This paper evaluates the two activities from the perspective of risk-averse smallholders to show whether or not the activities are likely to be adopted. The paper presents a methodology that combines enterprise budgets, biological production functions and Monte Carlo analysis in an expected utility framework to investigate the financial profitability, financial risk and ecological impacts of the activities in a smallholder context in four provinces of Rwanda. Risk is accounted for by charactering the variability of financial and ecological outcomes, including profitability, crop and timber yields, erosion and carbon storage. The distributions of net present values of each activity are estimated and compared using stochastic dominance and certainty equivalence criteria in order to rank the activities. The results show that both activities are too risky from the perspective of smallholders. Internalizing the value of public ecosystem services does not change the results.