Subject to great vagaries of weather, millions of farmers grow crops and raise cattle and buffalo on land irrigated by the waters of the Indus River. This millennial picture of rural Pakistan has been transformed in this study into a microeconomic analysis of risk and farmer behavior. Based on his own fieldwork, the author has applied theoretical modeling and empirical testing to agricultural households in Punjab to find out how the characteristics of households affect their production choices and to understand the relationship between their individual decisions and the incompleteness of the rural market structure. These issues, which have generated strong interest in the contemporary microeconomics of development, are the focus of this study.
When faced with substantial income uncertainties, the sample farmers in this study were unable to share risk efficiently with the outside world, and therefore had to diversify risk through individual means such as crop choice and livestock management. As an empirical study of development economics, this work demonstrates the effectiveness of modeling households in a theoretically consistent way. As an applied study on Pakistan's agriculture, it sheds new light on the positive role of livestock in enhancing the welfare of rural households, especially in the case of smallholders. This is the first part of a comprehensive study of risk in Pakistan's agriculture and its incidence in the household economy. Its findings have significant implications for rural development policies in South Asia.