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Estimation of production risk and risk preference function: a nonparametric approach

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  • Subal Kumbhakar

    ()

  • Efthymios Tsionas

    ()

Abstract

While estimating parametric production models with risk, one faces two main problems. The first problem is associated with the choice of functional forms on the mean production function and the risk (variance) function. The second problem is associated with the specification of the risk preference function. In a parametric model the researcher chooses some ad hoc functional form on all these. It is obvious that the estimated (i) technology (mean production function), (ii) risk and (iii) risk preference functions are affected by the choice of functional form. In this paper we consider an estimation framework that avoids assuming parametric functions on all three. In particular, this paper deals with nonparametric estimation of the technology, risk and risk preferences of producers when they face uncertainty in production. Uncertainty is modeled in the context of production theory where producers’ maximize expected utility of anticipated profit. A multi-stage nonparametric estimation procedure is used to estimate the production function, the output risk function and the risk preference function. No distributional assumption is made on the random term representing production uncertainty. No functional form is assumed on the underlying utility function. Rice farming data from Philippines are used for an empirical application of the proposed model. Rice farmers are, in general, found to be risk averse; labor is risk decreasing while fertilizer, land and materials are risk increasing. The mean risk premium is about 3% of mean profit. Copyright Springer Science+Business Media, LLC 2010

Suggested Citation

  • Subal Kumbhakar & Efthymios Tsionas, 2010. "Estimation of production risk and risk preference function: a nonparametric approach," Annals of Operations Research, Springer, vol. 176(1), pages 369-378, April.
  • Handle: RePEc:spr:annopr:v:176:y:2010:i:1:p:369-378:10.1007/s10479-008-0472-5
    DOI: 10.1007/s10479-008-0472-5
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    References listed on IDEAS

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    1. 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.
    2. Subal C. Kumbhakar, 2002. "Risk preference and productivity measurement under output price uncertainty," Empirical Economics, Springer, vol. 27(3), pages 461-472.
    3. 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.
    4. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
    5. Chambers, Robert G, 1983. "Scale and Productivity Measurement under Risk," American Economic Review, American Economic Association, vol. 73(4), pages 802-805, September.
    6. Chavas, Jean-Paul & Holt, Matthew T, 1996. "Economic Behavior under Uncertainty: A Joint Analysis of Risk Preferences and Technology," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 329-335, May.
    7. John M. Antle, 1987. "Econometric Estimation of Producers' Risk Attitudes," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 69(3), pages 509-522.
    8. Elie Appelbaum & Aman Ullah, 1997. "Estimation Of Moments And Production Decisions Under Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 631-637, November.
    9. H. Alan Love & Steven T. Buccola, 1991. "Joint Risk Preference-Technology Estimation with a Primal System," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(3), pages 765-774.
    10. Asche, Frank & Tveteras, Ragnar, 1999. "Modeling Production Risk With A Two-Step Procedure," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(2), pages 1-16, December.
    11. Adonis Yatchew, 1998. "Nonparametric Regression Techniques in Economics," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 669-721, June.
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    Cited by:

    1. Elie Appelbaum & Aman Ullah, 1997. "Estimation Of Moments And Production Decisions Under Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 631-637, November.
    2. Tsionas, Euthimios G. & Mamatzakis, Emmanuel C., 2017. "Adjustment costs in the technical efficiency: An application to global banking," European Journal of Operational Research, Elsevier, vol. 256(2), pages 640-649.
    3. Antti Saastamoinen, 2015. "Heteroscedasticity Or Production Risk? A Synthetic View," Journal of Economic Surveys, Wiley Blackwell, vol. 29(3), pages 459-478, July.

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