Farmer decisions under uncertainty

What is it about?

This study provides a decision framework to analyze optimal production diversification decisions under uncertainty for a farmer who is risk averse in the Arrow-Pratt sense and downside risk averse. The decision model explicitly accounts for the third central moment of the joint distribution of the crop’s portfolio returns, separating return fluctuations into downside risk and upside potential. This is especially relevant for asymmetrical return distributions, which are typical in an agricultural setting.

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Why is it important?

The general model contains the classical decision model as a special case. The benefit of the proposed generalization is that estimation of the structural econometric model allows each competing behavioral hypothesis to be discerned econometrically through the significance of the agent's coefficient of absolute and/or relative downside risk aversion.