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Enterprise diversification in US dairy: impact of risk preferences on scale and scope economies


  • Almuhanad Melhim
  • C. Richard Shumway


Enterprise diversification has recently become a prominent feature of US dairy farms. Scope economies and risk aversion are two forces that simultaneously determine diversification. We jointly estimate scope economies and determine risk preferences under price uncertainty. We reject risk neutrality in favour of Increasing Absolute Risk Aversion (IARA) and Increasing Relative Risk Aversion (IRRA). Scope economies are significant, but diminish with farm size. Increasing returns to scale exist in the production of multiple enterprises and diminish with size. Large farms operate under decreasing returns to scale. Ignoring risk preferences, a common practice in empirical work, results in an underestimate of the effect of scope economies for large farms.

Suggested Citation

  • Almuhanad Melhim & C. Richard Shumway, 2011. "Enterprise diversification in US dairy: impact of risk preferences on scale and scope economies," Applied Economics, Taylor & Francis Journals, vol. 43(26), pages 3849-3862.
  • Handle: RePEc:taf:applec:v:43:y:2011:i:26:p:3849-3862
    DOI: 10.1080/00036841003724478

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    References listed on IDEAS

    1. Bai, Jushan, 1999. "Likelihood ratio tests for multiple structural changes," Journal of Econometrics, Elsevier, vol. 91(2), pages 299-323, August.
    2. Bauwens, Luc & Lubrano, Michel & Richard, Jean-Francois, 2000. "Bayesian Inference in Dynamic Econometric Models," OUP Catalogue, Oxford University Press, number 9780198773139.
    3. Ahrens, W. Ashley & Sharma, Vijaya R., 1997. "Trends in Natural Resource Commodity Prices: Deterministic or Stochastic?," Journal of Environmental Economics and Management, Elsevier, vol. 33(1), pages 59-74, May.
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    Cited by:

    1. Zavelberg, Yvonne & Heckelei, Thomas & Wieck, Christine, 2016. "Entry deterring effects of contractual relations in the dairy processing sector," Bio-based and Applied Economics Journal, Italian Association of Agricultural and Applied Economics (AIEAA), vol. 5(1), April.
    2. repec:eee:touman:v:35:y:2013:i:c:p:278-283 is not listed on IDEAS
    3. Wimmer, Stefan G & Sauer, Johannes, 2016. "Diversification Versus Specialization: Empirical Evidence On The Optimal Structure Of European Dairy Farms," 56th Annual Conference, Bonn, Germany, September 28-30, 2016 244882, German Association of Agricultural Economists (GEWISOLA).

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