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An Investigation of the Relationship Between Constraint Omission and Risk Aversion in Firm Risk Programming Models

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  • Musser, Wesley N.
  • McCarl, Bruce A.
  • Smith, G. Scott

Abstract

A model with omitted resource constraints is suggested as an alternative to a risk aversion model for explaining economic behavior. This paper uses two standard mathematical programming models to further explore this issue. One model is a standard profit maximization linear programming model and the other is a risk averse quadratic programming model with part of the constraints deleted. Theoretical investigation of these models demonstrates that risk aversion can substitute for omitted resource constraints. A small empirical model is then solved under both formulations. With resource constraints deleted, positive risk aversion is necessary to obtain a similar enterprise organization as under profit maximization with complete constraints. These two solutions are then interpreted with the theoretical optimality conditions.

Suggested Citation

  • Musser, Wesley N. & McCarl, Bruce A. & Smith, G. Scott, 1986. "An Investigation of the Relationship Between Constraint Omission and Risk Aversion in Firm Risk Programming Models," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 18(2), pages 147-154, December.
    • Handle: RePEc:cup:jagaec:v:18:y:1986:i:02:p:147-154_00
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    References listed on IDEAS

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    1. John M. Antle, 1983. "Incorporating Risk in Production Analysis," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 65(5), pages 1099-1106.
    2. Lars Brink & Bruce McCarl, 1978. "The Tradeoff between Expected Return and Risk Among Cornbelt Farmers," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 60(2), pages 259-263.
    3. R. S. Gray & W. H. Furtan, 1983. "Risk Analysis in the Theory of the Firm: An Old Problem Revisited," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 31(1), pages 27-44, March.
    4. Adams, Richard M. & Menkhaus, Dale J. & Woolery, Bruce A., 1980. "Alternative Parameter Specification In E, V Analysis: Implications For Farm Level Decision Making," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 5(1), pages 1-8, July.
    5. Antle, John M., 1983. "Incorporating Risk In Production Analysis," 1983 Annual Meeting, July 31-August 3, West Lafayette, Indiana 279106, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    6. William Lin & G. W. Dean & C. V. Moore, 1974. "An Empirical Test of Utility vs. Profit Maximization in Agricultural Production," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 56(3), pages 497-508.
    7. Rulon D. Pope, 1981. "Supply Response and the Dispersion of Price Expectations," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 63(1), pages 161-163.
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    Cited by:

    1. Boggess, William G., 1987. "On Risk Modeling And Its Implications For Economic Analysis: A Discussion," Regional Research Projects > 1987: S-180 Annual Meeting, March 22-25, 1987, San Antonio, Texas 272334, Regional Research Projects > S-180: An Economic Analysis of Risk Management Strategies for Agricultural Production Firms.
    2. Gomez-Limon, Jose A. & Arriaza, Manuel & Riesgo, Laura, 2003. "An MCDM analysis of agricultural risk aversion," European Journal of Operational Research, Elsevier, vol. 151(3), pages 569-585, December.
    3. Wetzstein, Michael E. & Musser, Wesley N. & McClendon, Ronald W. & Edwards, David M., 1990. "A Case Study of Timeliness in the Selection of Risk-Efficient Machinery Complements," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 22(2), pages 165-177, December.
    4. Pannell, David J. & Malcolm, Bill & Kingwell, Ross S., 2000. "Are we risking too much? Perspectives on risk in farm modelling," Agricultural Economics, Blackwell, vol. 23(1), pages 69-78, June.

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