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Measuring farmers’ risk aversion: the unknown properties of the value function

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  • Cao, Ruixuan
  • Carpentier, Alain
  • Gohin, Alexandre

Abstract

We argue in this paper that available econometric estimates of farmers’ risk aversion do not measure true farmers’ preferences towards risky outcomes. Available analyses are mostly of static nature and indeed measure the parameters of the synthetic optimal value function rather than the deep parameters of the utility functions. We derive analytical and empirical results in a simple dynamic and stochastic framework showing that that there is not a simple relationship between utility functions and value functions when agents have many decision variables. In particular we find that the value function does not necessarily exhibit DARA when the instantaneous utility function satisfies DARA and conversely. We recommend performing dynamic econometric estimation with at least farm production and consumption data.

Suggested Citation

  • Cao, Ruixuan & Carpentier, Alain & Gohin, Alexandre, 2011. "Measuring farmers’ risk aversion: the unknown properties of the value function," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114623, European Association of Agricultural Economists.
  • Handle: RePEc:ags:eaae11:114623
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    File URL: http://purl.umn.edu/114623
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    References listed on IDEAS

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    1. David A. Hennessy, 1998. "The Production Effects of Agricultural Income Support Policies under Uncertainty," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 46-57.
    2. Pope, Rulon D. & LaFrance, Jeffrey T. & Just, Richard E., 2011. "Agricultural arbitrage and risk preferences," Journal of Econometrics, Elsevier, vol. 162(1), pages 35-43, May.
    3. Sergio H. Lence, 2007. "Joint Estimation of Risk Preferences and Technology: Flexible Utility or Futility?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(3), pages 581-598.
    4. Just, Richard E. & Just, David R., 2011. "Global identification of risk preferences with revealed preference data," Journal of Econometrics, Elsevier, vol. 162(1), pages 6-17, May.
    5. Santanu Roy & Rien Wagenvoort, 1996. "Risk preference and indirect utility in portfolio-choice problems," Journal of Economics, Springer, vol. 63(2), pages 139-150, June.
    6. Donald Meyer & Jack Meyer, 2005. "Relative Risk Aversion: What Do We Know?," Journal of Risk and Uncertainty, Springer, vol. 31(3), pages 243-262, December.
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    Cited by:

    1. Carpentier, Alain & Gohin, Alexandre & Heinzel, Christoph, 2012. "Production Effects of Direct Payments to Active Farmers: a Microeconomic Dynamic and Stochastic Analysis," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122447, European Association of Agricultural Economists.
    2. Sulewski, Piotr & Kłoczko-Gajewska, Anna, 2014. "Farmers’ risk perception, risk aversion and strategies to cope with production risk: an empirical study from Poland," Studies in Agricultural Economics, Research Institute for Agricultural Economics, vol. 116(3), December.
    3. Ifft, Jennifer & Wu, Shang & Kuethe, Todd, 2014. "The Impact of Pasture Insurance on Farmland Values," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 43(3), December.

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    Keywords

    Risk and Uncertainty;

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