A Supply-Response Model Under Invariant Risk Preferences
In this article we first develop a theoretically consistent supply-response model for producers with invariant preferences facing price risk, and then we empirically apply the model for a group of Cretan olive-oil producers. For doing so, we estimate a Generalized Leontief cost function and we use the price distribution historically faced by individual farmers to induce three different representations of price risk corresponding to the second, third and fourth lp norms. These risk measures are combined with the estimated cost-structure to provide three separate representations of the efficient frontier for the representative producer. Empirical results suggest that, regardless of risk measure used, all farmers curtail production in managing price risk.
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