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Stochastic efficiency analysis with risk aversion bounds: a correction

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  • Jack Meyer
  • James W. Richardson
  • Keith D. Schumann

Abstract

A recent paper by Hardaker et�al. (The Australian Journal of Agricultural and Resource Economics, 48, 2004a, 253) and book by Hardaker et�al. (Coping with Risk in Agriculture, 2004b) describe a procedure for determining an efficient set from among a set of random alternatives. This procedure, called stochastic efficiency with respect to a function (SERF), is claimed to make the same assumption concerning the risk aversion measures as does stochastic dominance with respect to a function (SDRF). This is claim is incorrect. SERF imposes an additional requirement on the risk aversion measures of the decision makers. Both procedures assume a lower and an upper bound on risk aversion, but SERF also assumes that all risk aversion measures are of the same functional form as these lower and upper bound functions. This additional strong requirement on risk preferences implies that the efficient set identified under SERF is usually smaller than that identified using SDRF. Copyright 2009 The Authors. Journal compilation 2009 Australian Agricultural and Resource Economics Society Inc. and Blackwell Publishing Asia Pty Ltd.

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Article provided by Australian Agricultural and Resource Economics Society in its journal Australian Journal of Agricultural and Resource Economics.

Volume (Year): 53 (2009)
Issue (Month): 4 (October)
Pages: 521-525

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Handle: RePEc:bla:ajarec:v:53:y:2009:i:4:p:521-525

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  1. Meyer, Jack, 1977. "Choice among distributions," Journal of Economic Theory, Elsevier, Elsevier, vol. 14(2), pages 326-336, April.
  2. McCarl, Bruce A., 1988. "Preference Among Risky Prospects Under Constant Risk Aversion," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, Southern Agricultural Economics Association, vol. 20(02), December.
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Cited by:
  1. Rodriguez, Hector German & Popp, Jennie & Gbur, Edward & Chaubey, Indrajeet, 2011. "Environmental and economic impacts of reducing total phosphorous runoff in an agricultural watershed," Agricultural Systems, Elsevier, Elsevier, vol. 104(8), pages 623-633, October.
  2. Eihab Fathelrahman & Aydin Basarir & Mohamed Gheblawi & Sherin Sherif & James Ascough, 2014. "Economic Risk and Efficiency Assessment of Fisheries in Abu-Dhabi, United Arab Emirates (UAE): A Stochastic Approach," Sustainability, MDPI, Open Access Journal, vol. 6(6), pages 3878-3898, June.

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