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Stochastic efficiency analysis with risk aversion bounds: a correction

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  • Jack Meyer
  • James W. Richardson
  • Keith D. Schumann

Abstract

A recent paper by Hardaker et al. (The Australian Journal of Agricultural and Resource Economics, 48, 2004a, 253) and book by Hardaker et al. (Coping with Risk in Agriculture, 2004b) describe a procedure for determining an efficient set from among a set of random alternatives. This procedure, called stochastic efficiency with respect to a function (SERF), is claimed to make the same assumption concerning the risk aversion measures as does stochastic dominance with respect to a function (SDRF). This is claim is incorrect. SERF imposes an additional requirement on the risk aversion measures of the decision makers. Both procedures assume a lower and an upper bound on risk aversion, but SERF also assumes that all risk aversion measures are of the same functional form as these lower and upper bound functions. This additional strong requirement on risk preferences implies that the efficient set identified under SERF is usually smaller than that identified using SDRF. Copyright 2009 The Authors. Journal compilation 2009 Australian Agricultural and Resource Economics Society Inc. and Blackwell Publishing Asia Pty Ltd.

Suggested Citation

  • Jack Meyer & James W. Richardson & Keith D. Schumann, 2009. "Stochastic efficiency analysis with risk aversion bounds: a correction," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 53(4), pages 521-525, October.
    • Handle: RePEc:bla:ajarec:v:53:y:2009:i:4:p:521-525
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    File URL: http://hdl.handle.net/10.1111/j.1467-8489.2009.00471.x
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    References listed on IDEAS

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    1. J. Brian Hardaker & James W. Richardson & Gudbrand Lien & Keith D. Schumann, 2004. "Stochastic efficiency analysis with risk aversion bounds: a simplified approach," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 48(2), pages 253-270, June.
    2. Meyer, Jack, 1977. "Choice among distributions," Journal of Economic Theory, Elsevier, vol. 14(2), pages 326-336, April.
    3. McCarl, Bruce A., 1988. "Preference Among Risky Prospects Under Constant Risk Aversion," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 20(2), pages 25-34, December.
    4. John S. Hammond, III, 1974. "Simplifying the Choice between Uncertain Prospects Where Preference is Nonlinear," Management Science, INFORMS, vol. 20(7), pages 1047-1072, March.
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    1. Liu, Yangxuan & Langemeier, Michael & Small, Ian & Joseph, Laura & Fry, William & Ristaino, Jean & Saville, Amanda, 2017. "A Risk Analysis of precision farming for tomato production," 2017 Annual Meeting, February 4-7, 2017, Mobile, Alabama 253119, Southern Agricultural Economics Association.
    2. Eihab Fathelrahman & Aydin Basarir & Mohamed Gheblawi & Sherin Sherif & James Ascough, 2014. "Economic Risk and Efficiency Assessment of Fisheries in Abu-Dhabi, United Arab Emirates (UAE): A Stochastic Approach," Sustainability, MDPI, vol. 6(6), pages 1-21, June.
    3. Yangxuan Liu & Michael R. Langemeier & Ian M. Small & Laura Joseph & William E. Fry & Jean B. Ristaino & Amanda Saville & Benjamin M. Gramig & Paul V. Preckel, 2018. "A Risk Analysis of Precision Agriculture Technology to Manage Tomato Late Blight," Sustainability, MDPI, vol. 10(9), pages 1-19, August.
    4. Varner, Brandon & Epplin, Francis & Doye, Damona & Schatzer, R. & Edwards, Jeffrey, 2012. "Pasture Rental Rates for Fall-Winter Grazing of Winter Wheat," Journal of the ASFMRA, American Society of Farm Managers and Rural Appraisers, vol. 2012, pages 1-12.
    5. J. B. Hardaker & Gudbrand Lien, 2010. "Stochastic efficiency analysis with risk aversion bounds: a comment," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(3), pages 379-383, July.
    6. Liu, Yangxuan & Langemeier, Michael & Small, Ian & Joseph, Laura & Fry, William, 2015. "Risk management strategies using potato precision farming technology," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205417, Agricultural and Applied Economics Association.
    7. Hardaker, J.B. & Lien, Gudbrand D., 2010. "Stochastic efficiency analysis with risk aversion bounds: a comment," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(3), pages 1-5.
    8. Rodriguez, Hector German & Popp, Jennie & Gbur, Edward & Chaubey, Indrajeet, 2011. "Environmental and economic impacts of reducing total phosphorous runoff in an agricultural watershed," Agricultural Systems, Elsevier, vol. 104(8), pages 623-633, October.

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