TESTS FOR THE ROLE OF RISK AVERSION ON INPUT USE

Agricultural inputs can create negative externalities. For risk averting agents, risk will 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 paper, conditions are identified on a stochastic technology to test that risk averters choose smaller input levels than risk neutral agents, and that an increase in risk aversion reduces input use. A robust statistical method (Klecan, McFadden, and McFadden) to test for dominance is adapted to stochastic production relations. It is found that the first hypothesis is likely true for nitrogen application on Iowa corn. Weaker evidence is found in favor of the second hypothesis.