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Economic efficiency and downside risk

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  • Elizabeth Anne Yeager
  • Michael R. Langemeier

Abstract

This article investigates the impact of downside risk on cost and revenue efficiency (RE) for a sample of farms. Downside risk or loss below a certain level of return is a concern regardless of producer risk preferences and thus a suitable measure of risk to use. Downside risk was measured as the weighted summation of net farm income below the amount needed for unpaid labour during the previous 10 years. Cost and RE were estimated using traditional input and output measures, and then re-estimated including each farm's downside risk. Comparisons were made between the efficient farms with and without downside risk and the average for all farms. As expected, downside risk plays an important role in explaining farm inefficiency. Failure to account for downside risk overstates inefficiency and can lead to unrealistic expectations in potential efficiency improvements.

Suggested Citation

  • Elizabeth Anne Yeager & Michael R. Langemeier, 2013. "Economic efficiency and downside risk," Applied Economics, Taylor & Francis Journals, vol. 45(36), pages 5012-5020, December.
    • Handle: RePEc:taf:applec:v:45:y:2013:i:36:p:5012-5020
    DOI: 10.1080/00036846.2013.808313
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    References listed on IDEAS

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    1. Thomas J. Linsmeier & Neil D. Pearson, 1996. "Risk Measurement: An Introduction to Value at Risk," Finance 9609004, University Library of Munich, Germany.
    2. Berg, Ernst & Starp, Michael, 2006. "Farm Level Risk Assessment Using Downside Risk Measures," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25400, International Association of Agricultural Economists.
    3. Linsmeier, Thomas J. & Pearson, Neil D., 1996. "Risk measurement: an introduction to value at risk," ACE Reports 14796, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
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    Cited by:

    1. Pokharel, Krisha Prasad & Featherstone, Allen M. & Archer, David W., 2019. "Estimating Economic Efficiency Under Risk For Agricultural Cooperatives," International Journal of Food and Agricultural Economics (IJFAEC), Alanya Alaaddin Keykubat University, Department of Economics and Finance, vol. 7(2), April.

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