Scale, productivity growth and risk response under uncertainty

Abstract

This study focuses on the analysis of the production behavior and risk preferences in the presence of output price uncertainty. Following a theoretical model based on the assumption of maximization of expected utility of profits, the approach used in this study infers information about risk preferences from the production characteristics of the farm. In addition, the nonparametric method of estimating elasticity of scale and technical change eliminates the need to impose a uniform production or cost functions on individual producers. The approach is applied to a panel of dairy farms, which are evaluated for their elasticity of scale and the total productivity growth components of their operations. Estimates of farmers' risk attitudes represented by individual marginal risk premiums are also related to socio-economic attributes of farmers. Overall, farm size plays an important role in explaining productivity and scale differences and has the most significant negative effect on marginal risk aversion. The magnitude of the impact of additions to the farm's dairy herd increases with scale of operations.