Farmer Responses to Changing Risk Aversion, Enterprise Variability and Resource Endowments
20 Pages Posted: 21 Jun 2013
Date Written: July 2013
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.
Keywords: economic returns, enterprise variability, farm enterprise choices, resource endowments, risk aversion
Suggested Citation: Suggested Citation