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The cost of agricultural production risk

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  • Babcock, Bruce A.
  • Shogren, Jason F.

Abstract

We examine the relative influence of preferences and technology on producers' ex ante willingness to pay for a reduction in production risk. A risk averse producer pays both an Arrow-Pratt risk premium to stabilize income and a 'production premium' to stabilize yield. Using soil-nitrate risks as our motivating example, we demonstrate that the production premium accounts for 40-85% of producers' willingness to pay for risk reduction. These results demonstrate the relative importance of technology over risk preferences when estimating the costs of agricultural production risk.

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Bibliographic Info

Article provided by Blackwell in its journal Agricultural Economics.

Volume (Year): 12 (1995)
Issue (Month): 2 (August)
Pages: 141-150

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Handle: RePEc:eee:agecon:v:12:y:1995:i:2:p:141-150

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  1. Babcock, Bruce A. & Chalfant, James A. & Collender, Robert N., 1987. "Simultaneous Input Demands And Land Allocation In Agricultural Production Under Certainty," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 12(02), December.
  2. Loehman, Edna T. & Nelson, Carl H., 1992. "Optimal Risk Management, Risk Aversion, And Production Function Properties," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(02), December.
  3. Babcock, Bruce A. & Blackmer, Alfred M., 1992. "The Value Of Reducing Temporal Input Nonuniformities," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(02), December.
  4. Lence, Sergio H. & Babcock, Bruce A., 1995. "Flexibility, Endogenous Risk, and the Protection Premium," Staff General Research Papers 1766, Iowa State University, Department of Economics.
  5. Babcock, Bruce A. & Choi, E. Kwan & Feinerman, Eli, 1993. "Risk and Probability Premiums for Cara Utility Function," Staff General Research Papers 596, Iowa State University, Department of Economics.
  6. Bernardo, Daniel J., 1988. "The Effect Of Spatial Variability Of Irrigation Applications On Risk-Efficient Irrigation Strategies," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 20(01), July.
  7. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
  8. Just, Richard E. & Pope, Rulon D., 1978. "Stochastic specification of production functions and economic implications," Journal of Econometrics, Elsevier, vol. 7(1), pages 67-86, February.
  9. Hanley, Nick, 1990. "The Economics of Nitrate Pollution," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 17(2), pages 129-51.
  10. Babcock, Bruce A. & Blackmer, A. M., 1992. "Value of Reducing Temporal Input Nonuniformities (The)," Staff General Research Papers 10587, Iowa State University, Department of Economics.
  11. Nick Hanley, 1990. "The Economics of Nitrate Pollution Control in the UK," Working Papers Series 90/5, University of Stirling, Division of Economics.
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Cited by:
  1. Isik, Murat & Khanna, Madhu, 2002. "Variable-Rate Nitrogen Application Under Uncertainty: Implications For Profitability And Nitrogen Use," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 27(01), July.
  2. Mitchell, Paul D., 2003. "Value of imperfect input information in agricultural production," Agricultural Systems, Elsevier, vol. 75(2-3), pages 277-294.
  3. Archer, David W. & Shogren, Jason F., 1996. "Endogenous risk in weed control management," Agricultural Economics: The Journal of the International Association of Agricultural Economists, International Association of Agricultural Economists, vol. 14(2), July.
  4. Lichtenberg, Erik, 2000. "Agriculture And The Environment," Working Papers 28567, University of Maryland, Department of Agricultural and Resource Economics.
  5. Isik, Murat & Khanna, Madhu, 2002. "Stochastic Technology, Risk Preferences And Adoption Of Site-Specific Technologies," 2002 Annual meeting, July 28-31, Long Beach, CA 19858, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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