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Risk Aversion versus Expected Profit Maximization with a Progressive Income Tax

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  • C. Robert Taylor

Abstract

This article introduces the terms "apparent," or "pseudo," risk aversion to represent those situations where "real" risk aversion is falsely attributed simply because second and higher moments of random variables are arguments in a decision maker's objective function. Apparent risk aversion can occur when stochastic variables nonlinearly enter the objective function. The progressive income tax structure is highlighted as a neglected but important source of apparent risk aversion. Such sources of apparent risk aversion should be recognized, otherwise an incorrect level of risk aversion might be claimed, or risk aversion might be claimed when risk neutrality prevails.

Suggested Citation

  • C. Robert Taylor, 1986. "Risk Aversion versus Expected Profit Maximization with a Progressive Income Tax," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 68(1), pages 137-143.
    • Handle: RePEc:oup:ajagec:v:68:y:1986:i:1:p:137-143.
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    File URL: http://hdl.handle.net/10.2307/1241658
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    Cited by:

    1. Dennis M. Conley, 1992. "Internal decision making in an agribusiness: A case study," Agribusiness, John Wiley & Sons, Ltd., vol. 8(4), pages 387-397.
    2. J. Pannell, David, 1991. "Pests and pesticides, risk and risk aversion," Agricultural Economics, Blackwell, vol. 5(4), pages 361-383, August.
    3. Francisco Rosas & Bruce Babcock & Dermot Hayes, 2015. "Nitrous oxide emission reductions from cutting excessive nitrogen fertilizer applications," Climatic Change, Springer, vol. 132(2), pages 353-367, September.
    4. C. Richard Shumway, 1993. "Production economics: Worthwhile investment?," Agricultural Economics, International Association of Agricultural Economists, vol. 9(2), pages 89-108, August.
    5. D. J. Pannell, 1990. "Responses To Risk In Weed Control Decisions Under Expected Profit Maximisation," Journal of Agricultural Economics, Wiley Blackwell, vol. 41(3), pages 391-401, September.
    6. Junwook Yoo, 2023. "Preferential corporate income tax treatment: Valuation in the market portfolio," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(3), pages 450-470, September.
    7. Mitchell, Paul D., 2003. "Value of imperfect input information in agricultural production," Agricultural Systems, Elsevier, vol. 75(2-3), pages 277-294.
    8. Babcock, Bruce A. & Shogren, Jason F., 1995. "The cost of agricultural production risk," Agricultural Economics, Blackwell, vol. 12(2), pages 141-150, August.
    9. Lim, Hongil & Shumway, C. Richard, 1989. "State-Level Nonparametric Tests Of Profit Maximization," 1989 Annual Meeting, July 30-August 2, Baton Rouge, Louisiana 270494, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    10. Atwood, Joseph A. & Buschena, David E., 2003. "Evaluating the magnitudes of financial transactions costs on risk behavior," Agricultural Systems, Elsevier, vol. 75(2-3), pages 235-249.
    11. Schnitkey, Gary D. & Taylor, C. Robert, 1987. "Conventional Capital Budgeting Versus Stochastic Dynamic Analysis Of Optimal Farmland Purchase And Sell Decisions," Illinois Agricultural Economics Staff Paper 244662, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    12. Olivier Mahul, 1996. "Décision d'investissement d'un agriculteur neutre au risque en présence d'une contrainte financière," Post-Print hal-02841740, HAL.
    13. Mjelde, James W. & Dixon, Bruce L. & Sonka, Steven T. & Lamb, Peter J., 1987. "Dynamic Programming Model of the Corn Production Process for East-Central Illinois," Staff Paper Series 257981, Texas A&M University, Department of Agricultural Economics.

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