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 H0.≤rn: that risk averters choose smaller input levels than risk neutral agents, and H0.≤ra : 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 H0.≤rn is likely true for nitrogen application on lowa corn. Weaker evidence is found in favor of H0.≤ra.