Production Risk and Optimal Input Decisions

Abstract

Abstract The paper examines the impact of production risk on a producer's optimal input decisions. Whether producers use more or fewer inputs in a yield‐risky environment depends on the sign of the marginal risk premium, which is determined by risk preferences and technology. I present the weakest condition on technology that is sufficient to sign the marginal risk premium for all risk‐averse preferences. If this condition fails to hold, the marginal risk premium is not of the same sign for all risk averters. Results are used to explore the properties of an estimated technology.