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The cost of agricultural production risk

  • Babcock, Bruce A.
  • Shogren, Jason F.

We examine the relative influence of preferences and technology on producers' ex ante willingness to pay for a reduction in production risk. A risk averse producer pays both an Arrow-Pratt risk premium to stabilize income and a 'production premium' to stabilize yield. Using soil-nitrate risks as our motivating example, we demonstrate that the production premium accounts for 40-85% of producers' willingness to pay for risk reduction. These results demonstrate the relative importance of technology over risk preferences when estimating the costs of agricultural production risk.

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Article provided by Blackwell in its journal Agricultural Economics.

Volume (Year): 12 (1995)
Issue (Month): 2 (August)
Pages: 141-150

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Handle: RePEc:eee:agecon:v:12:y:1995:i:2:p:141-150
Contact details of provider: Web page: http://www.blackwell-synergy.com/loi/agec

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  1. Lence, Sergio H. & Babcock, Bruce A., 1995. "Flexibility, Endogenous Risk, and the Protection Premium," Staff General Research Papers 1766, Iowa State University, Department of Economics.
  2. Babcock, Bruce A. & Choi, E. Kwan & Feinerman, Eli, 1993. "Risk And Probability Premiums For Cara Utility Functions," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 18(01), July.
  3. S. SriRamaratnam & David A. Bessler & M. Edward Rister & John E. Matocha & James Novak, 1987. "Fertilization under Uncertainty: An Analysis Based on Producer Yield Expectations," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 69(2), pages 349-357.
  4. Nick Hanley, 1990. "The Economics of Nitrate Pollution Control in the UK," Working Papers Series 90/5, University of Stirling, Division of Economics.
  5. 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.
  6. Bernardo, Daniel J., 1988. "The Effect Of Spatial Variability Of Irrigation Applications On Risk-Efficient Irrigation Strategies," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 20(01), July.
  7. Babcock, Bruce A. & Chalfant, James A. & Collender, R. N., 1987. "Simultaneous Input Demands and Land Allocation in Agricultural Production Under Uncertainty," Staff General Research Papers 10614, Iowa State University, Department of Economics.
  8. Babcock, Bruce A. & Blackmer, A. M., 1992. "Value of Reducing Temporal Input Nonuniformities (The)," Staff General Research Papers 10587, Iowa State University, Department of Economics.
  9. Bernardo, Daniel J., 1988. "The Effect of Spatial Variability of Irrigation Applications on Risk-Efficient Strategies," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 20(01), pages 77-86, July.
  10. Babcock, Bruce A. & Blackmer, Alfred M., 1992. "The Value Of Reducing Temporal Input Nonuniformities," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(02), December.
  11. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
  12. Atanu Saha & C. Richard Shumway & Hovav Talpaz, 1994. "Joint Estimation of Risk Preference Structure and Technology Using Expo-Power Utility," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(2), pages 173-184.
  13. 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.
  14. Hanley, Nick, 1990. "The Economics of Nitrate Pollution," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 17(2), pages 129-51.
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