IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v243y2015i3p1016-1027.html
   My bibliography  Save this article

A decomposition of profit loss under output price uncertainty

Author

Listed:
  • Boussemart, Jean-Philippe
  • Crainich, David
  • Leleu, Hervé

Abstract

In this paper, firm profit loss is decomposed as the sum of two terms related to the output price uncertainty (price expectation error and risk preference), plus one extra term expressing technical inefficiency. We then describe the implementation of our theoretical model in a robust data envelopment analysis (DEA) framework, which allows an effective and separate estimation of each term of the decomposition. In addition, we offer an operational tool to reveal producers’ risk preferences. A 2009 database of French fattening pig farms is used as an illustration. Our results indicate that risk preference and technical inefficiency are the main sources of profit loss.

Suggested Citation

  • Boussemart, Jean-Philippe & Crainich, David & Leleu, Hervé, 2015. "A decomposition of profit loss under output price uncertainty," European Journal of Operational Research, Elsevier, vol. 243(3), pages 1016-1027.
    • Handle: RePEc:eee:ejores:v:243:y:2015:i:3:p:1016-1027
    DOI: 10.1016/j.ejor.2014.12.044
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0377221714010625
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ejor.2014.12.044?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Wu, Craig C, 1979. "Price-Output Uncertainty and Allocative Efficiency: An Empirical Study of Small-Scale Farms," The Review of Economics and Statistics, MIT Press, vol. 61(2), pages 228-233, May.
    2. Robert G. Chambers & Atakelty Hailu & John Quiggin, 2011. "Event‐specific data envelopment models and efficiency analysis," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 55(1), pages 90-106, January.
    3. Joseph Henrich & Richard McElreath, 2002. "Are peasants risk-averse decision makers?," Artefactual Field Experiments 00066, The Field Experiments Website.
    4. Richard E. Just, 1974. "An Investigation of the Importance of Risk in Farmers' Decisions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 56(1), pages 14-25.
    5. John L. Dillon & Pasquale L. Scandizzo, 1978. "Risk Attitudes of Subsistence Farmers in Northeast Brazil: A Sampling Approach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 60(3), pages 425-435.
    6. Subal C. Kumbhakar, 2002. "Risk preference and productivity measurement under output price uncertainty," Empirical Economics, Springer, vol. 27(3), pages 461-472.
    7. Batra, Raveendra N & Ullah, Aman, 1974. "Competitive Firm and the Theory of Input Demand under Price Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 537-548, May/June.
    8. Robert G. Chambers & John Quiggin, 2002. "The State-Contingent Properties of Stochastic Production Functions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(2), pages 513-526.
    9. Kneip, Alois & Simar, Léopold & Wilson, Paul W., 2008. "Asymptotics And Consistent Bootstraps For Dea Estimators In Nonparametric Frontier Models," Econometric Theory, Cambridge University Press, vol. 24(6), pages 1663-1697, December.
    10. Skevas, Theodoros & Stefanou, Spiro E. & Oude Lansink, Alfons, 2014. "Pesticide use, environmental spillovers and efficiency: A DEA risk-adjusted efficiency approach applied to Dutch arable farming," European Journal of Operational Research, Elsevier, vol. 237(2), pages 658-664.
    11. Arnaud Reynaud & Stéphane Couture, 2012. "Stability of risk preference measures: results from a field experiment on French farmers," Theory and Decision, Springer, vol. 73(2), pages 203-221, August.
    12. Dervaux, B. & Leleu, H. & Minvielle, E. & Valdmanis, V. & Aegerter, P. & Guidet, B., 2009. "Performance of French intensive care units: A directional distance function approach at the patient level," International Journal of Production Economics, Elsevier, vol. 120(2), pages 585-594, August.
    13. Just, Richard E. & Pope, Rulon D., 1978. "Stochastic specification of production functions and economic implications," Journal of Econometrics, Elsevier, vol. 7(1), pages 67-86, February.
    14. Jean-Paul Chavas & Matthew T. Holt, 1990. "Acreage Decisions Under Risk: The Case of Corn and Soybeans," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 72(3), pages 529-538.
    15. Hartman, Richard, 1975. "Competitive Firm and the Theory of Input Demand under Price Uncertainty: Comment," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1289-1290, December.
    16. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
    17. Skevas, Theodoros & Lansink, Alfons Oude & Stefanou, Spiro E., 2012. "Measuring technical efficiency in the presence of pesticide spillovers and production uncertainty: The case of Dutch arable farms," European Journal of Operational Research, Elsevier, vol. 223(2), pages 550-559.
    18. Fandel, Günter & Lorth, Michael, 2009. "On the technical (in)efficiency of a profit maximum," International Journal of Production Economics, Elsevier, vol. 121(2), pages 409-426, October.
    19. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    20. Cazals, Catherine & Florens, Jean-Pierre & Simar, Leopold, 2002. "Nonparametric frontier estimation: a robust approach," Journal of Econometrics, Elsevier, vol. 106(1), pages 1-25, January.
    21. Rulon D. Pope & Richard E. Just, 1991. "On Testing the Structure of Risk Preferences in Agricultural Supply Analysis," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(3), pages 743-748.
    22. Bond, Gary E. & Wonder, Bernard, 1980. "Risk Attitudes Amongst Australian Farmers," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 24(1), pages 1-19, April.
    23. Gary E. Bond & Bernard Wonder, 1980. "Risk Attitudes Amongst Australian Farmers," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 24(1), pages 16-34, April.
    24. Chambers, Robert G, 1983. "Scale and Productivity Measurement under Risk," American Economic Review, American Economic Association, vol. 73(4), pages 802-805, September.
    25. Chavas, Jean-Paul & Holt, Matthew T, 1996. "Economic Behavior under Uncertainty: A Joint Analysis of Risk Preferences and Technology," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 329-335, May.
    26. B. Dervaux & H. Leleu & E. Minvielle & V. Valdmanis & P. Aegerter & B. Guidet, 2009. "Assessing Performance of French Intensive Care Units: A Directional Distance Function Approach at the Patient Level," Post-Print halshs-00476492, HAL.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Crainich, David & Eeckhoudt, Louis & Menegatti, Mario, 2016. "Changing risks and optimal effort," Journal of Economic Behavior & Organization, Elsevier, vol. 125(C), pages 97-106.
    2. Walheer, Barnabé & Zhang, Linjia, 2018. "Profit Luenberger and Malmquist-Luenberger indexes for multi-activity decision making units: the case of the star-rated hotel industry in China," RIEI Working Papers 2018-06, Xi'an Jiaotong-Liverpool University, Research Institute for Economic Integration.
    3. Cherchye, Laurens & De Rock, Bram & Walheer, Barnabé, 2016. "Multi-output profit efficiency and directional distance functions," Omega, Elsevier, vol. 61(C), pages 100-109.
    4. Chen, Xiang & Grifell-Tatjé, Emili & Fu, Tsu-Tan, 2023. "A profit difference decomposition model for measuring group performance: an application to Chinese and Taiwanese commercial banks," Omega, Elsevier, vol. 120(C).
    5. Alghalith, Moawia, 2016. "A note on the theory of the firm under multiple uncertainties," European Journal of Operational Research, Elsevier, vol. 251(1), pages 341-343.
    6. Barnabé Walheer, 2019. "Dynamic directional nonparametric profit efficiency analysis for a single decision-making unit: an aggregation approach," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 41(4), pages 1123-1149, December.
    7. Walheer, Barnabe & Hudik, Marek, 2019. "Reallocation of resources in multidivisional firms: A nonparametric approach," International Journal of Production Economics, Elsevier, vol. 214(C), pages 196-205.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jean-Philippe Boussemart & David Crainich & Hervé Leleu, 2012. "A decomposition of profit inefficiency into price expectation error, preferences towards risk and technical inefficiency," Working Papers 2012-ECO-04, IESEG School of Management.
    2. Robert G. Chambers & Margarita Genius & Vangelis Tzouvelekas, 2021. "Invariant Risk Preferences and Supply Response under Price Risk," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(5), pages 1802-1819, October.
    3. Hurley, Terrance M., 2010. "A review of agricultural production risk in the developing world," Working Papers 188476, HarvestChoice.
    4. Wall, Charles A. & Fisher, Brian S., 1988. "Supply Response and the Theory of Production and Profit Functions," Review of Marketing and Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 56(03), pages 1-22, December.
    5. Blancard, Stephane & Boussemart, Jean-Philippe & Crainich, D. & Leleu, Herve, 2008. "How can allocative inefficiency reveal risk preference? An empirical investigation on French wheat farms," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 44208, European Association of Agricultural Economists.
    6. Kingwell, Ross S., 1995. "Effects of Tactical Responses and Risk Aversion on Farm Wheat Supply," Review of Marketing and Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 62(01), pages 1-14, April.
    7. Jean-Philippe Boussemart & Walter Briec & Christophe Tavera, 2011. "More evidence on technological catching-up in the manufacturing sector," Applied Economics, Taylor & Francis Journals, vol. 43(18), pages 2321-2330.
    8. Serra, Teresa & Oude Lansink, Alfons, 2014. "Measuring the impacts of production risk on technical efficiency: A state-contingent conditional order-m approach," European Journal of Operational Research, Elsevier, vol. 239(1), pages 237-242.
    9. Viaggi, Davide & Raggi, Meri & Gomez y Paloma, Sergio, 2011. "Farm-household investment behaviour and the CAP decoupling: Methodological issues in assessing policy impacts," Journal of Policy Modeling, Elsevier, vol. 33(1), pages 127-145, January.
    10. 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.
    11. Gomez-Limon, Jose Antonio & Riesgo, Laura & Arriaza Balmón, Manuel, 2002. "Agricultural Risk Aversion Revisited: A Multicriteria Decision-Making Approach," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24827, European Association of Agricultural Economists.
    12. David S. Bullock & Philip Garcia & Kie‐Yup Shin, 2005. "Measuring producer welfare under output price uncertainty and risk non‐neutrality," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 49(1), pages 1-21, March.
    13. Subal Kumbhakar & Efthymios Tsionas, 2010. "Estimation of production risk and risk preference function: a nonparametric approach," Annals of Operations Research, Springer, vol. 176(1), pages 369-378, April.
    14. Tabares Elizabeth & Ramón Rosales, 2005. "Políticas de control de oferta de coca: la zanahoria" y "el garrote""," Revista Desarrollo y Sociedad, Universidad de los Andes,Facultad de Economía, CEDE, May.
    15. Z. Bar‐Shira & R.E. Just & D. Zilberman, 1997. "Estimation of farmers' risk attitude: an econometric approach," Agricultural Economics, International Association of Agricultural Economists, vol. 17(2-3), pages 211-222, December.
    16. Julie SUBERVIE, 2006. "The impact of world price instability on agricultural supply according to several macroeconomic factors," Working Papers 200604, CERDI.
    17. Tomasz Gerard Czekaj & Arne Henningsen, 2013. "Panel Data Nonparametric Estimation of Production Risk and Risk Preferences: An Application to Polish Dairy Farms," IFRO Working Paper 2013/6, University of Copenhagen, Department of Food and Resource Economics.
    18. Atanu Saha & C. Richard Shumway, 1998. "Refutable implications of the firm model under risk," Applied Economics, Taylor & Francis Journals, vol. 30(4), pages 441-448.
    19. Chambers, Robert G. & Tzouvelekas, Vangelis, 2013. "Estimating population dynamics without population data," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 510-522.
    20. Lence, Sergio Horacio, 1991. "Dynamic firm behavior under uncertainty," ISU General Staff Papers 1991010108000010656, Iowa State University, Department of Economics.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:243:y:2015:i:3:p:1016-1027. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.