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Land Allocation In The Presence Of Estimation Risk

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Author Info

  • Lence, Sergio H.
  • Hayes, Dermot J.

Abstract

Estimation risk occurs when parameters relevant for decision making are uncertain. Bayes'Â’ criterion is consistent with expected-utility maximization in the presence of estimation risk. This article examines optimal (BayesÂ’') land allocations and land allocations obtained using the traditional plug-in approach and two alternative decision rules. BayesÂ’' allocations are much better economically than the other allocations when there are few sample observations relative to activities. Calculation of certainty equivalent returns (CERs) with estimation risk is also discussed and illustrated. CERs are typically (and incorrectly) calculated with the plug-in approach. Plug-in CERs may be extremely misleading.

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File URL: http://purl.umn.edu/30929
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Bibliographic Info

Article provided by Western Agricultural Economics Association in its journal Journal of Agricultural and Resource Economics.

Volume (Year): 20 (1995)
Issue (Month): 01 (July)
Pages:

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Handle: RePEc:ags:jlaare:30929

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Web page: http://waeaonline.org/
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Related research

Keywords: Land Economics/Use;

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References

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  1. Geweke, John, 1988. "Antithetic acceleration of Monte Carlo integration in Bayesian inference," Journal of Econometrics, Elsevier, vol. 38(1-2), pages 73-89.
  2. Lence, Sergio H. & Hayes, Dermot J., 1994. "Parameter-Based Decision Making Under Estimation Risk: An Application to Futures Trading," Staff General Research Papers 693, Iowa State University, Department of Economics.
  3. Coles, Jeffrey L. & Loewenstein, Uri, 1988. "Equilibrium pricing and portfolio composition in the presence of uncertain parameters," Journal of Financial Economics, Elsevier, vol. 22(2), pages 279-303, December.
  4. Klein, Roger W, et al, 1978. "Decisions with Estimation Uncertainty," Econometrica, Econometric Society, vol. 46(6), pages 1363-87, November.
  5. Chen, Son-Nan & Brown, Stephen J, 1983. " Estimation Risk and Simple Rules for Optimal Portfolio Selection," Journal of Finance, American Finance Association, vol. 38(4), pages 1087-93, September.
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Cited by:
  1. Babcock, Bruce A. & Pautsch, Gregory R., 1998. "Moving From Uniform To Variable Fertilizer Rates On Iowa Corn: Effects On Rates And Returns," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(02), December.
  2. Wang, Xuecai & Dorfman, Jeffrey H. & McKissick, John C. & Turner, Steven C., 2001. "Optimal Marketing Decisions For Feeder Cattle Under Price And Production Risk," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 33(03), December.
  3. Lien, Gudbrand & Hardaker, J. Brian & Asseldonk, Marcel A.P.M. van & Richardson, James W., 2009. "Risk programming and sparse data: how to get more reliable results," Agricultural Systems, Elsevier, vol. 101(1-2), pages 42-48, June.
  4. Gregory R. Pautsch & Bruce A. Babcock & F. Jay Breidt, 1998. "Optimal Sampling Under a Geostatistical Model," Center for Agricultural and Rural Development (CARD) Publications 98-wp200, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  5. Gregory R. Pautsch & Bruce A. Babcock & F. Jay Breidt, 1999. "Optimal Information Acquisition under a Geostatistical Model," Center for Agricultural and Rural Development (CARD) Publications 99-wp217, Center for Agricultural and Rural Development (CARD) at Iowa State University.

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