Economic Efficiency Adjusted for Risk Preferences

Elizabeth Yeager and Michael Langemeier

No 124012, 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington from Agricultural and Applied Economics Association

Abstract: This study investigates the impact of risk preferences on economic efficiency scores. Risk averse individuals may be less likely to adopt new technologies and have lower production levels than individuals with other risk preferences. Nonparametric techniques are used to estimate cost and revenue efficiency for a sample of Kansas farms. Each farm had a risk preference score and the scores in the sample ranged from 5 to 86 where a smaller value represents greater risk aversion. Efficiency estimates were first calculated using traditional input and output measures. Efficiency was re-estimated including the inverse risk preference score as a non-discretionary input. Comparisons were made between the characteristics of the farms with an observed efficiency score change and farms without an efficiency score change with the inclusion of inverse risk preferences. As expected, risk preference plays a role in explaining farm inefficiency. Failure to account for risk preferences overstates inefficiency and the improvements in efficiency that can be made.

Keywords: Agribusiness; Farm Management; Production Economics; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 21
Date: 2012
New Economics Papers: this item is included in nep-eff and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea12:124012

DOI: 10.22004/ag.econ.124012

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