Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Estimation of production risk and risk preference function
T2 - a nonparametric approach
AU - Kumbhakar, Subal C.
AU - Tsionas, Michael
PY - 2010/4
Y1 - 2010/4
N2 - While estimating parametric production models with risk, one faces two main problems. The first problem is associated with the choice of functional forms on the mean production function and the risk (variance) function. The second problem is associated with the specification of the risk preference function. In a parametric model the researcher chooses some ad hoc functional form on all these. It is obvious that the estimated (i) technology (mean production function), (ii) risk and (iii) risk preference functions are affected by the choice of functional form. In this paper we consider an estimation framework that avoids assuming parametric functions on all three. In particular, this paper deals with nonparametric estimation of the technology, risk and risk preferences of producers when they face uncertainty in production. Uncertainty is modeled in the context of production theory where producers’ maximize expected utility of anticipated profit. A multi-stage nonparametric estimation procedure is used to estimate the production function, the output risk function and the risk preference function. No distributional assumption is made on the random term representing production uncertainty. No functional form is assumed on the underlying utility function. Rice farming data from Philippines are used for an empirical application of the proposed model. Rice farmers are, in general, found to be risk averse; labor is risk decreasing while fertilizer, land and materials are risk increasing. The mean risk premium is about 3% of mean profit.
AB - While estimating parametric production models with risk, one faces two main problems. The first problem is associated with the choice of functional forms on the mean production function and the risk (variance) function. The second problem is associated with the specification of the risk preference function. In a parametric model the researcher chooses some ad hoc functional form on all these. It is obvious that the estimated (i) technology (mean production function), (ii) risk and (iii) risk preference functions are affected by the choice of functional form. In this paper we consider an estimation framework that avoids assuming parametric functions on all three. In particular, this paper deals with nonparametric estimation of the technology, risk and risk preferences of producers when they face uncertainty in production. Uncertainty is modeled in the context of production theory where producers’ maximize expected utility of anticipated profit. A multi-stage nonparametric estimation procedure is used to estimate the production function, the output risk function and the risk preference function. No distributional assumption is made on the random term representing production uncertainty. No functional form is assumed on the underlying utility function. Rice farming data from Philippines are used for an empirical application of the proposed model. Rice farmers are, in general, found to be risk averse; labor is risk decreasing while fertilizer, land and materials are risk increasing. The mean risk premium is about 3% of mean profit.
KW - Production risk
KW - Risk preference function
KW - Risk premium
KW - Kernel method
U2 - 10.1007/s10479-008-0472-5
DO - 10.1007/s10479-008-0472-5
M3 - Journal article
VL - 176
SP - 369
EP - 378
JO - Annals of Operations Research
JF - Annals of Operations Research
SN - 0254-5330
IS - 1
ER -