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Production Risk and the Estimation of Ex-ante Cost Functions

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  • Moschini, GianCarlo
Abstract
Following the pioneering work of Shephard (1953), Diewert (1971) and McFadden (1978), the cost function approach has proven very useful and popular in applied production studies. Insofar as the hypothesis of cost minimization is correct, estimating a cost function is usually deemed preferable to estimating a primal specification of the technology because, by using input prices instead of input quantities on the right-hand side of estimating equations, one removes a potential source of simultaneous equation bias. Specifically, in the cost function framework input choices are modeled as a function of input prices and the output level. But, as emphasized in the recent article by Pope and Just (1996), a problem then arises when the , production technology is inherently stochastic. Such a case is very important in agricultural and environmental production models, where climatic and pest factors outside of the producer's control affect realized output in a nontrivial fashion. When producers make their input choices prior to the resolution of this production uncertainty, then the standard cost function specification (which is conditional on realized output level) is not relevant.

Suggested Citation

  • Moschini, GianCarlo, 1999. "Production Risk and the Estimation of Ex-ante Cost Functions," ISU General Staff Papers 199903010800001316, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:199903010800001316
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    2. Cherchye, L. & Post, G.T., 2001. "Methodological Advances in Dea," ERIM Report Series Research in Management ERS-2001-53-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    3. Just, David R., 2011. "Calibrating the wealth effects of decoupled payments: Does decreasing absolute risk aversion matter?," Journal of Econometrics, Elsevier, vol. 162(1), pages 25-34, May.
    4. Gouzaye, Amadou & Vitale, Jeffrey D. & Epplin, Francis M. & Adam, Brian D. & Stoecker, Arthur L., 2013. "The Value of Price Stabilization Policy for Cotton Producers in Burkina Faso," 2013 Annual Meeting, February 2-5, 2013, Orlando, Florida 142882, Southern Agricultural Economics Association.
    5. Just, Richard E., 2000. "Some Guiding Principles for Empirical Production Research in Agriculture," Agricultural and Resource Economics Review, Cambridge University Press, vol. 29(2), pages 138-158, October.
    6. Philippe K. Widmer & Maria Trottmann & Peter Zweifel, 2018. "Choice of reserve capacity by hospitals: a problem for prospective payment," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 19(5), pages 663-673, June.
    7. Jesse B. Tack & Rulon D. Pope & Jeffrey T. LaFrance & Ricardo H. Cavazos, 2015. "Modelling an aggregate agricultural panel with application to US farm input demands," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 42(3), pages 371-396.
    8. Just, Richard E., 2003. "Risk research in agricultural economics: opportunities and challenges for the next twenty-five years," Agricultural Systems, Elsevier, vol. 75(2-3), pages 123-159.
    9. Alston, Julian M. & Andersen, Matthew A. & Pardey, Philip G., 2006. "Asset Utilization and Bias in Measures of U.S. Agricultural Productivity," 2006 Annual meeting, July 23-26, Long Beach, CA 21220, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    10. Emir Malikov & Diego Restrepo-Tobón & Subal Kumbhakar, 2015. "Estimation of banking technology under credit uncertainty," Empirical Economics, Springer, vol. 49(1), pages 185-211, August.
    11. Matthew Andersen & Julian Alston & Philip Pardey, 2012. "Capital use intensity and productivity biases," Journal of Productivity Analysis, Springer, vol. 37(1), pages 59-71, February.
    12. Polome, Philippe & Harmignie, Olivier & Frahan, Bruno Henry de, 2006. "Farm-level Acreage Allocation under Risk," 2006 Annual meeting, July 23-26, Long Beach, CA 21306, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    13. Hansen, Kristiana & Frahan, Bruno Henry de, 2011. "Evaluation of Agro-Environmental Policy through a Calibrated Simulation Farm Model," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114577, European Association of Agricultural Economists.
    14. Esposti, Roberto & Pierani, Pierpaolo, 2002. "Public R&D Investment and Cost Behaviour in Italian Agriculture: 1960-1995," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24974, European Association of Agricultural Economists.
    15. Bittencourt, Mauricio Vaz Lobo & Sampaio, Armando Vaz, 2011. "Are Dual and Primal Estimations Equivalent in the Presence of Stochastic Errors in Input Demand?," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 31(2), December.
    16. Moro, Daniele & Sckokai, Paolo, 2013. "The impact of decoupled payments on farm choices: Conceptual and methodological challenges," Food Policy, Elsevier, vol. 41(C), pages 28-38.
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    18. Wing, Ian Sue & De Cian, Enrica & Mistry, Malcolm N., 2021. "Global vulnerability of crop yields to climate change," Journal of Environmental Economics and Management, Elsevier, vol. 109(C).

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