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An Investigation of the Relationship Between Constraint Omission and Risk Aversion in Firm Risk Programming Models

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  • Musser, Wesley N.
  • McCarl, Bruce A.
  • Smith, G. Scott

Abstract

A model with omitted resource constraints is suggested as an alternative to a risk aversion model for explaining economic behavior. This paper uses two standard mathematical programming models to further explore this issue. One model is a standard profit maximization linear programming model and the other is a risk averse quadratic programming model with part of the constraints deleted. Theoretical investigation of these models demonstrates that risk aversion can substitute for omitted resource constraints. A small empirical model is then solved under both formulations. With resource constraints deleted, positive risk aversion is necessary to obtain a similar enterprise organization as under profit maximization with complete constraints. These two solutions are then interpreted with the theoretical optimality conditions.

Suggested Citation

  • Musser, Wesley N. & McCarl, Bruce A. & Smith, G. Scott, 1986. "An Investigation of the Relationship Between Constraint Omission and Risk Aversion in Firm Risk Programming Models," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 18(2), pages 147-154, December.
    • Handle: RePEc:cup:jagaec:v:18:y:1986:i:02:p:147-154_00
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    Cited by:

    1. Wetzstein, Michael E. & Musser, Wesley N. & McClendon, Ronald W. & Edwards, David M., 1990. "A Case Study of Timeliness in the Selection of Risk-Efficient Machinery Complements," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 22(2), pages 165-177, December.
    2. Boggess, William G., 1987. "On Risk Modeling And Its Implications For Economic Analysis: A Discussion," Regional Research Projects > 1987: S-180 Annual Meeting, March 22-25, 1987, San Antonio, Texas 272334, Regional Research Projects > S-180: An Economic Analysis of Risk Management Strategies for Agricultural Production Firms.
    3. Pannell, David J. & Malcolm, Bill & Kingwell, Ross S., 2000. "Are we risking too much? Perspectives on risk in farm modelling," Agricultural Economics, Blackwell, vol. 23(1), pages 69-78, June.
    4. Gomez-Limon, Jose A. & Arriaza, Manuel & Riesgo, Laura, 2003. "An MCDM analysis of agricultural risk aversion," European Journal of Operational Research, Elsevier, vol. 151(3), pages 569-585, December.

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