THE IMPACT OF RISK AVERSION, TIME PREFERENCE, AND INTERTEMPORAL SUBSTITUTABILITY ON FARMERS' RISK MANAGEMENT BEHAVIOR

Wen Du and H. Holly Wang

No 36235, 2004 Annual Meeting, June 30-July 2, 2004, Honolulu, Hawaii from Western Agricultural Economics Association

Abstract: This paper applies the generalized expected utility (GEU) approach developed by Epstein and Zin (1989, 1991) to dynamic agricultural risk analysis. We explore the impacts of alternative preference parameters of farmers including of risk aversion, time preference, and intertemporal substitutability on their optimal risk management portfolio selection. Furthermore, we extend the GEU model by introducing a welfare measure, the equivalence variation, and investigate the impacts of U.S. government programs and market institutions on farmers' risk management decisions. We find farmers' optimal hedge ratio is sensitive to changes in the preferences and the effects of these preferences changes are intertwined. The policy impact analysis shows government payment programs has a greater effect on farmers' optimal choice than crop insurance and crop insurance outperforms hedging. Both crop insurance and government payments are influential to farmers' welfare improvement.

Keywords: Risk; and; Uncertainty (search for similar items in EconPapers)
Pages: 34
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:ags:waeaho:36235

DOI: 10.22004/ag.econ.36235

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