empirical estimation and use of risk preferences discussion in 1976 a number of people present today attended a conference in mexico which has since then 1978 resulted in a state of the arts volume edited by roumasset boussard and singh on risk uncertainty and agricultural development the papers presented today convey the feeling that since that time there has been little progress in measuring risk aversion or in discriminating between alternative theories of behavior under risk i will argue that this is because the papers concentrate on approaches to measurement of risk aversion and testing of theories which hold little promise of fast progress please excuse that i will be somewhat partisan in the remarks and rely heavily on studies with which i have been involved i know them best

risk averters that love risk marginal risk aversion in comparison to a reference gamble we propose an analytical distinction between standard risk aversion based on the valuation of a single gamble and marginal risk aversion based on the change in valuation between two gambles we measure marginal risk aversion in two dimensions mean and variance data from a field experiment is used to study marginal risk aversion our results suggest that individuals rely on a reference gamble when assessing marginal risk individual responses to marginal changes in mean and variance are nearly identical in direction and magnitude suggesting that information on both standard and marginal risk aversion is needed to accurately model behavior copyright 2008 oxford university press

estimation of farmers risk attitude an econometric approach abstract an econometric procedure for estimating arrow pratt coefficients of risk aversion is derived the model of farmers allocating land among different crops and time between leisure and labor allows for testing arrow s hypotheses of decreasing absolute risk aversion and increasing relative risk aversion the empirical results support these hypotheses

the index of leading indicators measurement without theory twenty five years later if the success of a specific approach to economic analysis can be measured by its longevity and continued popularity under a variety of environments then the use in business cycle forecasting of leading economic indicators as originally developed by wesley mitchell and arthur burns 1938 at the national bureau of economic research must stand near the top one might say peak of such successes this is rather remarkable in light of the criticism it has faced continually since koopmans 1947 in a review of burns and mitchell 1946 first decried the lack of any theory behind the nber business cycle methodology since its introduction the composite index of leading indicators now published monthly by the u s bureau of economic analysis bea has been widely monitored as a guide to future economic performance the use of leading indicators survived the period of advancement and demise of the structural approach to econometric forecasting and if anything has enjoyed a resurgence in recent years as more sophisticated time series techniques of measurement without theory have been developed in fact the relationship between the leading indicator approach and general time series methods of the type described by box and jenkins 1970 was formalized by sargent and sims 1977 who pointed out that forecasting with a composite index may be seen as the imposition of a specific set of restrictions on the vector autoregression containing the individual series included in the index from this standpoint it is possible to evaluate formally the index of leading indicators as a tool for prediction and such is the purpose of this paper there are two main questions to be answered

the economics of worldwide stagflation the last fifteen years have witnessed dramatic changes in economics not only in the manner in which the economics profession views economics but also in the manner in which the general public views economics and economists by the late 1960 s there had emerged more or less a consensus macroeconomic framework that is an agreed upon structure to be used to study economic problems at the aggregate level robert solow stated as quoted in leijonhufvud 1968

replacement of agricultural price supports by area payments in the european union and the effects on pesticide use this article determines the contribution of recent european union agricultural policy reforms on the use of pesticides our theoretical model extends the multioutput generalization of the lichtenberg zilberman damage control technology model developed by chambers and lichtenberg our empirical analysis uses farm level data for a sample of french farms results suggest that price effects on the use of pesticides are always more elastic than area payment effects this indicates that policy reforms consisting of a reduction in price supports in favor of area payments may reduce application of crop protection inputs such policy changes which represent a certain degree of decoupling took place under the 1992 common agricultural policy reforms

what do the leading indicators lead the authors find that the composite leading index cli is useful for forecasting gross national product gnp both in sample and in an out of sample real time exercise they propose a nonlinear specification in which cyclical shifts of the cli precede those in gnp however the authors find that better forecasts are provided by a simple linear relation between current gnp growth and the growth rate of the cli during the previous quarter along with an error correction term corresponding to the previous quarter s logarithmic difference between the level of the cli and the level of gnp copyright 1996 by university of chicago press

nonparametric test of the expected utility hypothesis a nonparametric test of the expected utility hypothesis is developed in this paper the expected utility hypothesis is shown to hold if there exists a feasible solution to a particular system of linear inequalities furthermore when a feasible solution exists boundaries on the coefficient of absolute risk aversion can be calculated explicitly the test is applied to data on land allocations modeled as choices over lottery sets results contrary to those obtained in many laboratory experiments show that in most cases the expected utility hypothesis cannot be rejected

real wage adjustment and employment policies in the nordic countries nordic employment lars calmfors and ragnar nymoen sweden and norway but also finland have managed to avoid the general western european rise in unemployment the article discusses to what extent this can be explained by a smoothly functioning wage setting system and by active labour market policies the analysis confirms earlier findings of an unusually large responsiveness of wages to unemployment in sweden and norway it is however questionable whether this can be explained by centralized bargaining nor do the authors find any evidence that corporatist tax wage bargains should have contributed to wage restraint the absence of hysteresis effects may be one explanation of why unemployment rises were easily reversed the most controversial finding is that active labour market policies may have strong wage raising effects if so labour market programmes may actually reduce regular employment and even increase open unemployment the authors argue that a reduced rather than an increased emphasis on labour market policies may have been an important factor for real wage restraint especially in sweden this may be an important lesson for those who regard extensive labour market programmes of the swedish type as a blueprint to follow

when risk generates chaos abstract with risk averse producers the traditional linear cobweb model becomes nonlinear the currently produced quantity is an homographic function of previous years quantities this may result in the market generating chaotic price and quantity series especially if demand is rigid hedging facilities are unable to reduce the magnitude of fluctuations which are socially detrimental especially from the consumers point of view this might justify public intervention on markets such as staple food commodities or health cares

econometric estimation of producers risk attitudes general methods are proposed for the identification and econometric estimation of the parameters of the distribution of risk attitudes in a producer population the proposed methods also provide the basis for the development of statistical tests of model specification and of behavioral hypotheses econometric risk attitude estimation is shown to be possible under less restrictive conditions than previously believed a moment based version of the general model is applied to indian data and the econometrically estimated risk attitudes are presented and compared to experimental results for a similar group of producers

an examination of the commerce department leading lndicator approach bivariate time series models are built that describe the empirical relationships between industrial production and components of the composite index of leading indicators cli this reveals the indicators average lead times at all points of the business cycle the forms of the distributed lags involved and their ability to explain later movements in economic activity the relationship between industrial production and the cli is also examined and used to test the contribution of the cli toward improving time series model forecasts of the 1980 and 1981 recessions

an appraisal of expected utility hypothesis tests constructed from responses to hypothetical questions and experimental choices a decision problem exists when the possible consequences of a decision are important and the best choice is not obvious anderson dillon hardaker moreover when the consequences of each choice are described in probabilistic terms the decision problem is said to exist under uncertainty the expected utility hypothesis euh characterizes the following solution for an uncertain decision problem a identify the action choices available a

the wage curve convexity kinks and composition effects a detailed analysis is provided of the shape of the wage curve using annual time series for norwegian manufacturing the main results are summarized as follows unemployment affects wages significantly and we provide evidence in favour of a monotonically decreasing but highly non linear wage curve the long term unemployed exert less of a wage dampening effect than do recently laid off workers and real wage responsiveness to unemployment seems also to be stronger with higher inflation

joint risk preference technology estimation with a primal system applied studies of the firm in a risky environment have concentrated either on the firm s technology or on its risk preferences these models result in generally inconsistent and inefficient parameter estimates a primal model is proposed which allows a firm s preferences and technology to be estimated jointly in the presence of risk the model is applied to iowa corn production and estimated technology parameters are compared with those from other approaches modest risk aversion leads to inelastic even backbending per acre supplies and input demands yield heteroskedasticity in inputs leads to supply heteroskedasticity in prices especially for risk neutral firms

production risk risk aversion and the determination of risk attitudes among spanish rice producers agricultural production is subject to risk and the attitudes of producers toward risk will influence input choices insofar as these affect production risk risk attitudes in turn may be affected by certain socioeconomic characteristics of producers using 2004 survey data from a cross section of 130 spanish rice farms we estimate risk aversion coefficients of farmers and investigate the influence of a series of socioeconomic variables on their risk attitudes our results show that farmers exhibit risk averse behavior and that risk attitudes are related to a series of socioeconomic characteristics in particular the belief that the farm will continue after the producer retires is found to increase the degree of risk aversion while age is found to have nonlinear effects on risk aversion off farm income especially from nonagricultural activities is found to reduce risk aversion neither the educational level of the producer nor the presence of dependents on the household is found to have an effect on risk preferences regarding the production technology we find that land labor and fitosanitary products are risk reducing inputs whereas capital seeds and fertilizer all increase risk

decreasing aversion under ambiguity abstract under which condition does the set of desirable uncertain prospects expand when wealth increases we show that the decreasing concavity dc of the utility function u is necessary and sufficient in the maxmin expected utility model in the smooth ambiguity aversion model with the ambiguity valuation function the dc of u and of u is necessary and sufficient an alternative classical definition of decreasing aversion is based on the hypothesis that the investment in a risky asset is increasing in wealth we show that this hypothesis does not hold in general under ambiguity aversion and that one needs to constrain the structure of ambiguity to obtain unambiguous results

household specific food price differentials and high value crop production in rural ghana using panel data from ghana we have examined the relationship between household specific producer consumer price differentials and rural household cropland allocation between food and high value crops we test the hypothesis that cereal price bands induce a shift of resources away from high value crop production making smallholders appear unresponsive to price incentives our results lend support to this hypothesis implying that a policy aiming at increasing farmers income through high value crop production may fail if hard and soft infrastructure does not improve in rural areas and if staple crop productivity does not increase significantly

diminishing marginal utility of wealth and calibration of risk in agriculture expected utility theory eut has dominated the agricultural economics literature on behavior under risk particularly since the late 1970s in eut risk preferences are completely defined by the curvature of the utility function an expected utility maximizer with a concave utility curve would avoid choices that represent a greater wealth risk estimates of risk aversion coefficients based on assumed utility functional forms have been valued in predicting producers responses to proposed policy see saha shumway and talpaz for a review yet these estimates are biased if there are omitted variables such as knowledge understanding and managerial expertise that are related to the probability distribution of profit if the production function is jointly estimated with the utility function then the riskincreasing or risk reducing properties of production inputs may also wrongly be ascribed to the concavity of the utility function since allais substantial evidence has been accumulated to suggest systematic flaws in eut mostly in experimental settings with small stakes applied economists have regarded these violations as exceptions due to the special circumstances surrounding their observation recently rabin showed that attributing all risk behavior in small gambles solely to diminishing marginal utility of wealth leads to improbable levels of risk aversion his calibration theorem based on dichotomous choices suggests that a person who turns down a lottery with a 0 5 probability of winning 125 and 0 5 probability of losing 100 will always turn down any bet with a 0 5 chance of losing 600 no matter how large of a gain may be had with the remaining 0 5 probability we generalize rabin s work to continuous payoff distributions and continuous choice problems to show that his criticism extends to realistic risky situations the concavity problem is not limited to small money risks rather when risky choices have similar average payouts utility functions must display ridiculous levels of concavity to predict individual choices below we present our general calibration problem and apply the results to an empirical risk study in agricultural economics to illustrate the unintended consequences of using eut to explain risk response

joint estimation of risk preferences and technology flexible utility or futility a thought experiment is designed to investigate whether the structure of risk aversion i e the changes in absolute or relative risk aversion associated with changes in wealth can be estimated with reasonable precision from agricultural production data findings strongly suggest that typical production data are unlikely to allow identification of the structure of risk aversion a flexible utility parameterization is found to slightly worsen technology parameter estimates results also indicate that even under a restricted utility specification utility parameter estimates are biased further their quality is much worse when shocks are not large or samples are small

non parametric estimation of decision makers risk aversion abstract a new non parametric method to estimate a decision maker s coefficient of absolute risk aversion from observed economic behaviour is explained the method uses the expected value variance e v framework and quadratic programming an empirical illustration is given using norwegian farm level data

differential uncertainties and risk attitudes between conventional and organic producers the case of spanish arable crop farmers the growing importance of economic factors in farmers decision to go organic has raised interest in characterizing the economic behavior of organic versus conventional farms published analyses so far have not considered differential uncertainties and farmers risk preferences between conventional and organic practices when comparing these techniques our article attempts to assess this issue we use a model of farmer decision under risk to analyze the differential values between spanish cop organic and conventional farms and to assess the incentives for adoption of organic practices results show that organic and conventional farms do have different abilities to control production risk as well as different risk preferences organic price premiums and subsidies are found to be powerful instruments to motivate adoption of organic techniques

nonstructural risk attitude estimation this paper presents an econometric approach to risk attitude estimation that does not require joint estimation of the structure of the firm s technology and input decision rules the nonstructural approach replaces optimal input choice with the assumption that farmers optimally manage their portfolios of productive activities by thus shifting the focus from the detailed production decisions of the farm manager to the net returns of the whole farm operation the modeling problem is simplified the nonstructural approach is used to estimate risk attitudes in three indian villages the results are compared to previous experimental and econometric estimates from the same villages

empirical estimation and use of risk preferences an appraisal of estimation methods that use actual economic decisions the topic addressed in this paper concerns the conceptual basis estimation procedures and resources required for implementation of methods for estimating risk preferences by observing behavior an attempt is made to review and appraise previous literature as well as to explore some alternative approaches to begin it is important to contrast four general types of empirical settings of interest these are micro farm level macro market or other aggregations descriptive positivistic and prescriptive normative studies the prescriptive or conditionally normative studies seemingly have dominated agricultural economic studies of risk these generally have been micro in nature and have focused on

efficiency wages and local versus central wage bargaining abstract a simple efficiency wage model is extended to allow for the presence of unions the presence of unions aggravates the unemployment caused by efficiency wage considerations provided the labour demand elasticity is not too much larger than one local firm level wage bargaining gives a higher negotiated wage than central wage bargaining implying higher unemployment under local wage bargaining than under central wage bargaining

stochastic technology risk preferences and adoption of site specific technologies a model of farmer decision making is developed to determine the extent to which uncertainties about soil fertility and weather affect the value of site specific technologies ssts using jointly estimated risk and technology parameters uncertainty can lead risk averse farmers to apply more fertilizers and generate more pollution than in the certainty case ignoring uncertainty and risk aversion would overestimate the economic and environmental benefits of ssts and underestimate the subsidy required to induce adoption accounting for uncertainties and risk preferences might explain the low observed adoption rates of ssts improving the accuracy of ssts would increase the incentives for adoption

optimal prediction of cyclical downturns abstract in the conventional way of visualizing economic time series the prediction problem does not dichotomize into predicting turning points and predicting conditional means yet the prediction of turning points has always been considered a separate issue in business cycle literature the paper first discusses these issues and then describes a model where the prediction of turning points does separate from the prediction of conditional means using the model an optimal way of predicting turning points is derived and applied to u s data the paper uses time series methodology and the theory of optimal stopping times

wait unemployment in europe unemployment michael burda the sustained increase in unemployment rates in western europe is a major policy problem not least because of the increasing significance of long term unemployment a large part of cross country differences in long term unemployment rates can be predicted by a simple model of wait unemployment potential workers may refuse low paying jobs and invest in unemployment if this increases the chance that they will subsequently be offered a higher paying job this investment decision is sensitive both to the level of unemployment benefit and to its duration and coverage of the labour force more generous unemployment benefit will tend to increase average unemployment rates the analysis can also explain how increases in the labour force contribute to unemployment and why service sector employment has grown more slowly in europe than in the us over the past 15 years unemployment benefit is not set in a vacuum the paper also considers forces governing the evolution of benefit rates and entitlements during the period

wealth information acquisition and portfolio choice i solve with an approximation a grossman stiglitz economy under general preferences thus allowing for wealth effects because information generates increasing returns decreasing absolute risk aversion in conjunction with the availability of costly information is sufficient to explain why wealthier households invest a larger fraction of their wealth in risky assets one no longer needs to resort to decreasing relative risk aversion an empirically questionable assumption furthermore i show how to distinguish empirically between these two explanations finally i find that the availability of costly information exacerbates wealth inequalities copyright 2004 oxford university press

dynamic decisions under risk application of ito stochastic control in agriculture in agricultural economics most studies of dynamic decisions under risk have been empirical with less emphasis on theory in finance resource economics and general economics however ito stochastic control is popular for theoretical work optimal decisions can be characterized using the powerful ito stochastic calculus this paper describes the assumptions and methods of ito control constructs a dynamic model of agricultural decisions under risk and illustrates with four examples