Tests for the Role of Risk Aversion on Input Use

Abstract

For risk-averting agents, risks alter production decisions while the existence of institutions to insure against adverse states of nature will likely restore decisions toward levels under risk neutrality. In this article, conditions are identified on a stochastic technology to test H rn 0,≤ : that risk averters choose smaller input levels than risk neutral agents, and H ra 0,≤ : that an increase in risk aversion reduces input use. A robust statistical method to test for dominance is adapted to stochastic production relations. It is found that H rn 0,≤ is likely true for nitrogen application on Iowa corn. Weaker evidence is found in favor of H ra 0,≤ . Copyright 2003, Oxford University Press.