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Nonparametric estimation of production risk and risk preference functions

In: Nonparametric Econometric Methods

Author

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  • Subal C. Kumbhakar
  • Efthymios G. Tsionas

Abstract

This paper deals with estimation of risk and the risk preference function when producers face uncertainties in production (usually labeled as production risk) and output price. These uncertainties are modeled in the context of production theory where the objective of the producers is to maximize expected utility of normalized anticipated profit. Models are proposed to estimate risk preference of individual producers under (i) only production risk, (ii) only price risk, (iii) both production and price risks, (iv) production risk with technical inefficiency, (v) price risk with technical inefficiency, and (vi) both production and price risks with technical inefficiency. We discuss estimation of the production function, the output risk function, and the risk preference functions in some of these cases. Norwegian salmon farming data is used for an empirical application of some of the proposed models. We find that salmon farmers are, in general, risk averse. Labor is found to be risk decreasing while capital and feed are found to be risk increasing.

Suggested Citation

  • Subal C. Kumbhakar & Efthymios G. Tsionas, 2009. "Nonparametric estimation of production risk and risk preference functions," Advances in Econometrics, in: Nonparametric Econometric Methods, pages 223-260, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-9053(2009)0000025010
    DOI: 10.1108/S0731-9053(2009)0000025010
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