An Investigation of the Relationship Between Constraint Omission and Risk Aversion in Firm Risk Programming Models

Wesley Musser, Bruce McCarl and G. Scott Smith

Journal of Agricultural and Applied Economics, 1986, vol. 18, issue 2, 147-154

Abstract: A model with omitted resource constraints is suggested as an alternative to a risk aversion model for explaining economic behavior. This paper uses two standard mathematical programming models to further explore this issue. One model is a standard profit maximization linear programming model and the other is a risk averse quadratic programming model with part of the constraints deleted. Theoretical investigation of these models demonstrates that risk aversion can substitute for omitted resource constraints. A small empirical model is then solved under both formulations. With resource constraints deleted, positive risk aversion is necessary to obtain a similar enterprise organization as under profit maximization with complete constraints. These two solutions are then interpreted with the theoretical optimality conditions.

Date: 1986
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Journal Article: AN INVESTIGATION OF THE RELATIONSHIP BETWEEN CONSTRAINT OMISSION AND RISK AVERSION IN FIRM RISK PROGRAMMNG MODELS (1986)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jagaec:v:18:y:1986:i:02:p:147-154_00

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