Farmer responses to changing risk aversion, enterprise variability and resource endowments

Abstract

The focus of this article is on assessing how risk aversion, enterprise variability and resource endowments affect farm land-use decisions and economic returns. A theoretical model of a two-enterprise, two-constraint farm is developed, and then, an empirical illustration for an Australian farm is provided. The methodology used builds on previous expected mean-variance (EV) models by incorporating land and budget constraints. The Kuhn-Tucker conditions of the EV model are examined to highlight that changes in resource endowments have larger effects on economic returns, than do changes in risk aversion or enterprise gross margin variability. It was also found that combinations of enterprise mixes that do not use all available resources can produce higher economic returns, relative to some enterprise mixes that use all available resources. © 2013 Australian Agricultural and Resource Economics Society Inc. and Wiley Publishing Asia Pty Ltd.