Information Value and Risk Premium in Agricultural Production: The Case of Split Nitrogen Application for Corn

Abstract

This article considers an agricultural production model of sequential nitrogen application under risk. Because of random shocks between subsequent production stages, optimal fertilization decisions depend on the magnitude of farmers' risk aversion (risk premium), and the possibility for farmers to process information (value of information). We propose a joint estimation procedure of technology and risk aversion parameters, using a structural, simulation‐based econometric procedure. Parameter estimates allow to compute both the value of information and the risk premium, which account for about 30% of fertilizer cost for Midwest corn producers.

Keywords: agricultural production, generalized method‐of‐moments estimation, information value, production risk, risk aversion, Q120