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Tests for the Role of Risk Aversion on Input Use

  • Roosen, Jutta
  • Hennessy, David A.

For risk averting agents, risks alter production decisions while the existence of institutions to insure against adverse states of nature will likely restore decisions toward levels under risk neutrality. In this paper, conditions are identified on a stochastic technology to test H sub {0, le} sup {rn}: that risk averters choose smaller input levels than risk neutral agents, and H sub {0,le} sup {ra}: that an increase in risk aversion reduces input use. A robust statistical method (Klecan, McFadden, and McFadden) to test for dominance is adapted to stochastic production relations. It is found that H sub {0, le} sup {rn} is likely true for nitrogen application on Iowa corn. Weaker evidence is found in favor of H sub {0,le} sup {ra}.

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 10071.

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Date of creation: 01 Feb 2003
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Publication status: Published in American Journal of Agricultural Economics, February 2003, vol. 85 no. 1, pp. 30-43
Handle: RePEc:isu:genres:10071
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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  1. Ian Jewitt, 1989. "Choosing Between Risky Prospects: The Characterization of Comparative Statics Results, and Location Independent Risk," Management Science, INFORMS, vol. 35(1), pages 60-70, January.
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  7. Bruce A. Babcock & Joseph A. Herriges, 1994. "Input Demand Under Yield and Revenue Insurance," Center for Agricultural and Rural Development (CARD) Publications 94-wp127, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  8. Chambers, Robert G. & Quiggin, John, 1996. "Non-point-source pollution regulation as a multi-task principal-agent problem," Journal of Public Economics, Elsevier, vol. 59(1), pages 95-116, January.
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  10. 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 329-35, May.
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  12. Robert G. Chambers & John Quiggin, 2002. "The State-Contingent Properties of Stochastic Production Functions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(2), pages 513-526.
  13. Anderson, Gordon, 1996. "Nonparametric Tests of Stochastic Dominance in Income Distributions," Econometrica, Econometric Society, vol. 64(5), pages 1183-93, September.
  14. Melinda Smale & Jason Hartell & Paul W. Heisey & Ben Senauer, 1998. "The Contribution of Genetic Resources and Diversity to Wheat Production in the Punjab of Pakistan," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(3), pages 482-493.
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