An ecological economic assessment of risk-reducing effects of species diversity in managed grasslands

•We use data from a rich diversity experiment covering in total 60 species and a period of 6 years.•Species diversity has a risk-reducing effect on grassland yield.•For risk averse decision maker, species diversity has significant insurance values.•Diversity can serve as valuable ex-ante risk management strategy.

Over the last decade, it has been shown in the ecology literature that species diversity increases yield stability in managed grasslands. Here, we develop and apply ecological economic and econometric frameworks to evaluate these potential risk-reducing effects of species diversity in terms of yields and their temporal stability from a farmer's perspective. Our empirical analysis is based on a rich panel dataset obtained from a diversity experiment covering in total 60 species and a period of 6 years. We find empirical evidence for the risk-reducing effect of species diversity and the economic assessment reveals significant insurance values associated with diversity for a risk-averse decision maker. Thus, the economic value of diversity would be underestimated if not accounting for this property, and species diversity may serve as valuable ex-ante risk management strategy.