Marketed Surplus under Risk: Do Peasants Agree with Sandmo?

Using a newly defined notion of aversion to income risk, the behavior of the marketed-surplus producer under price risk is characterized. Unlike the familiar case first examined by Sandmo, output depends on both ordinal preferences for goods and on risk attitudes. Conditions are found that yield an output level under risk that is smaller than under certainty. If these conditions do not hold, both risk and risk aversion may have a positive effect on output. Implications for econometric studies of risk attitudes are considered and illustrated with an example. Finally, we examine the effect of uncertainty on the peasant's long-run equilibrium.