When farmers produce under contract, there is a tension between risk and incentives. We provide a simple characterization of optimal risk and show that "less risk" need not mean "smaller variance."

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Abstract

When farmers produce under contract, there may be an important tension between risk and incentives. We provide a simple characterization of the optimal risk in any production system. We also show that “less risk” need not imply “smaller variance,” and that while at the margin the behavior of risk-averse farmers may appear to be nearly risk-neutral, it does not follow that one can generally treat such producers “as if” they were risk-neutral without being greatly led astray.

BibTeX

@Article{	  ligon02,
  author	= {Ethan Ligon},
  title		= {Optimal Risk in Agricultural Contracts},
  journal	= {Agricultural Systems},
  year		= 2002,
  volume	= 75,
  pages		= {265--276},
  doi		= {10.1016/S0308-521X(02)00069-0}
}