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Economic Efficiency Adjusted for Risk Preferences

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  • Yeager, Elizabeth A.
  • Langemeier, Michael R.

Abstract

This study investigates the impact of risk preferences on economic efficiency scores. Risk averse individuals may be less likely to adopt new technologies and have lower production levels than individuals with other risk preferences. Nonparametric techniques are used to estimate cost and revenue efficiency for a sample of Kansas farms. Each farm had a risk preference score and the scores in the sample ranged from 5 to 86 where a smaller value represents greater risk aversion. Efficiency estimates were first calculated using traditional input and output measures. Efficiency was re-estimated including the inverse risk preference score as a non-discretionary input. Comparisons were made between the characteristics of the farms with an observed efficiency score change and farms without an efficiency score change with the inclusion of inverse risk preferences. As expected, risk preference plays a role in explaining farm inefficiency. Failure to account for risk preferences overstates inefficiency and the improvements in efficiency that can be made.

Suggested Citation

  • Yeager, Elizabeth A. & Langemeier, Michael R., 2012. "Economic Efficiency Adjusted for Risk Preferences," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124012, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea12:124012
    DOI: 10.22004/ag.econ.124012
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    File URL: https://ageconsearch.umn.edu/record/124012/files/YeagerRev.pdf
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    References listed on IDEAS

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    1. John L. Dillon & J. R. Anderson, 1971. "Allocative Efficiency, Traditional Agriculture, and Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 53(1), pages 26-32.
    2. Rolf Fare & Shawna Grosskopf & William Weber, 2004. "The effect of risk-based capital requirements on profit efficiency in banking," Applied Economics, Taylor & Francis Journals, vol. 36(15), pages 1731-1743.
    3. Chavas, Jean-Paul & Aliber, Michael, 1993. "An Analysis Of Economic Efficiency In Agriculture: A Nonparametric Approach," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 18(01), pages 1-16, July.
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    Cited by:

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    2. Robbie Maris & Zack Dorner, 2021. "Cost Efficiency Analysis using Operating Profit Margin for the New Zealand Dairy Industry," Working Papers in Economics 21/04, University of Waikato.

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    Keywords

    Agribusiness; Farm Management; Production Economics; Risk and Uncertainty;
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