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.


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