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Risk Analysis For Proprietors With Limited Liability: A Mean- Variance, Safety- First Synthesis

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  • Collins, Robert A.
  • Gbur, Edward E.

Abstract

Since nearly the entire U.S. output of agricultural commodities is produced by proprietors with limited liability, it is important to understand how limited liability affects decision in a risky environment. This article extends the work of Robinson and Barry; Robinson and Lev; and Robinson, Barry, and Burghart. It provides a rigorous derivation of one of their objective functions, compares it to standard risk analysis tools, and suggests several methods of empirical implementation. Under some conditions, utility maximization in the limited liability environment is consistent with optimization of Roy's safety-first criterion, while in other situations Freund's mean-variance criterion is appropriate. However, it is easy to demonstrate cases where neither criterion is applicable.

Suggested Citation

  • Collins, Robert A. & Gbur, Edward E., 1991. "Risk Analysis For Proprietors With Limited Liability: A Mean- Variance, Safety- First Synthesis," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 16(01), pages 1-7, July.
    • Handle: RePEc:ags:wjagec:32617
    DOI: 10.22004/ag.econ.32617
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    File URL: https://ageconsearch.umn.edu/record/32617/files/16010156.pdf
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    References listed on IDEAS

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    1. Robert Neil Collender & James A. Chalfant, 1986. "An Alternative Approach to Decisions under Uncertainty Using the Empirical Moment-Generating Function," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 68(3), pages 727-731.
    2. Robison, Lindon J. & Barry, Peter J. & Burghardt, William G., 1987. "Borrowing Behavior Under Financial Stress By The Proprietary Firm: A Theoretical Analysis," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 12(2), pages 1-8, December.
    3. repec:cdl:agrebk:1141583 is not listed on IDEAS
    4. Joseph Yassour & David Zilberman & Gordon C. Rausser, 1981. "Optimal Choices among Alternative Technologies with Stochastic Yield," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 63(4), pages 718-723.
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    Cited by:

    1. Schnitkey, Gary D. & Novak, Frank, 1994. "Alternative Formulations Of Risk Preferences In Dynamic Investment Models," 1994 Quantifying Long Run Agricultural Risks and Evaluating Farmer Responses Risk, Technical Committee Meeting, March 24-26, 1994, Gulf Shores State Park, Alabama 271560, Regional Research Projects > S-232: Quantifying Long Run Agricultural Risks and Evaluating Farmer Responses to Risk.
    2. Maria-Teresa Bosch-Badia & Joan Montllor-Serrats & Maria-Antonia Tarrazon-Rodon, 2020. "Risk Analysis through the Half-Normal Distribution," Mathematics, MDPI, vol. 8(11), pages 1-27, November.

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    Keywords

    Risk and Uncertainty;

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