Journal Article

Cost Function Estimation under Risk Aversion

Rulon D. Pope and Richard E. Just

in American Journal of Agricultural Economics

Published on behalf of Agricultural and Applied Economics Association

Volume 80, issue 2, pages 296-302
Published in print May 1998 | ISSN: 0002-9092
Published online May 1998 | e-ISSN: 1467-8276 | DOI: http://dx.doi.org/10.2307/1244502
Cost Function Estimation under Risk Aversion

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Standard definitions of the cost function do not admit risk. Standard (ex post) approaches to cost function estimation yield biased and inconsistent estimates when production is stochastic. Recently an (ex ante) approach to cost function estimation with stochastic production has been developed by imbedding the distance function in the cost function estimation problem. We generalize the approach to consider risk aversion in decision making. Only two empirical studies have considered stochastic production in cost function estimation. Both have required constant returns to scale. We demonstrate a methodology sufficiently general to consider nonconstant returns to scale.

Keywords: cost function; distance function; risk; D240

Journal Article.  0 words. 

Subjects: Production and Organizations

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