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Optimal Risk Management, Risk Aversion, And Production Function Properties


  • Loehman, Edna T.
  • Nelson, Carl H.


For production risk with identified physical causes, the nature of risk, production characteristics, risk preference, and prices determine optimal input use. Here, a two-way classification for pairs of inputs – each input as being risk increasing or decreasing and pairs as being risk substitutes or complements – provides sufficient conditions to determine how risk aversion should affect input use. Unlike the Sandmo price risk averse firm may produce more expected output and use more inputs than a risk neutral firm. Sufficient conditions to determine types for pairs of inputs are also related to properties of the production function.

Suggested Citation

  • 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.
  • Handle: RePEc:ags:jlaare:30950

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    References listed on IDEAS

    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. Ian Jewitt, 1987. "Risk Aversion and the Choice Between Risky Prospects: The Preservation of Comparative Statics Results," Review of Economic Studies, Oxford University Press, vol. 54(1), pages 73-85.
    3. Meyer, Jack & Ormiston, Michael B., 1983. "The comparative statics of cumulative distribution function changes for the class of risk averse agents," Journal of Economic Theory, Elsevier, vol. 31(1), pages 153-169, October.
    4. Anderson, Jock R. & Feder, Gershon, 2007. "Agricultural Extension," Handbook of Agricultural Economics, Elsevier.
    5. 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.
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    Cited by:

    1. Chang, Hung-Hao & Mishra, Ashok K. & Livingston, Michael, 2011. "Agricultural policy and its impact on fuel usage: Empirical evidence from farm household analysis," Applied Energy, Elsevier, vol. 88(1), pages 348-353, January.
    2. Willis, David B. & Whittlesey, Norman K., 1998. "The Effect Of Stochastic Irrigation Demands And Surface Water Supplies On On-Farm Water Management," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(01), July.
    3. Karagiannis, Giannis, 1999. "Proportional Profit Taxes And Resource Management Under Production Uncertainty," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(02), December.
    4. Soule, Meredith J. & Nimon, R. Wesley & Mullarkey, Daniel J., 2001. "Risk Management And The Environment: Impacts At The Intensive And Extensive Margins," 2001 Annual meeting, August 5-8, Chicago, IL 20670, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Yano, Yuki & Blandford, David, 2008. "Agri-Environmental Policy and Moral Hazard under Output Price and Production Uncertainty," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 44323, European Association of Agricultural Economists.
    6. Kusadokoro, Motoi, 2010. "Risk Aversion and Optimal Input Utilization under State Contingent Technology," Japanese Journal of Rural Economics, Agricultural Economics Society of Japan (AESJ), vol. 12.
    7. Mitchell, Paul David, 1999. "The theory and practice of green insurance: insurance to encourage the adoption of corn rootworm IPM," ISU General Staff Papers 1999010108000013154, Iowa State University, Department of Economics.
    8. Babcock, Bruce A. & Shogren, Jason F., 1995. "The cost of agricultural production risk," Agricultural Economics of Agricultural Economists, International Association of Agricultural Economists, vol. 12(2), August.
    9. repec:bla:stratm:v:38:y:2017:i:11:p:2168-2188 is not listed on IDEAS
    10. Nimon, R. Wesley & Mishra, Ashok K., 2001. "Revenue Insurance and Chemical Input Use Rates," 2001 Annual meeting, August 5-8, Chicago, IL 20669, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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    Production Economics; Risk and Uncertainty;


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