Linear risk programming in supply response analysis

C.-Hennig Hanf and Rolf A.E. Mueller

European Review of Agricultural Economics, 1979, vol. 6, issue 4, 435-452

Abstract: Summary Not allowing for risk in linear programming models of supply results in biased supply estimates. The objective of this study was to provide some empirical evidence about the reduction of certainty bias in supply estimates derived from various MOTAD linear programming models. In addition, the impact on derived supply frontiers of errors in the estimation of risk aversion coefficients and of errors in the aggregation of these coefficients is numerically assessed. MOTAD, MOTAD with infeasibility cost and MOTAD with RINOCO models of representative dairy farms of West Germany are developed. Supply frontiers are fitted to the normative supply estimates and compared with that derived from a deterministic model. Results have shown that estimated levels of supply are significantly reduced if allowance for risk is made, that correct estimation of risk aversion coefficients is essential if emphasis is on absolute levels of supply, and that errors in the aggregation of risk aversion coefficients may be of minor importance.

Date: 1979
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