An Empirical Test of Utility vs. Profit Maximization in Agricultural Production

TLDR

Production economics literature often assumes farmers maximize profits. The study tests whether Bernoullian and lexicographic utility better predict farmer behavior than profit maximization. The authors used six large California farms, developing after‑income‑tax expectation‑variance boundaries and profit‑maximizing crop plans for each. Bernoullian utility best predicted actual and planned crop patterns, lexicographic utility performed second, and profit maximization performed worst.

Abstract

Abstract Production economics literature contains many studies which assume that the producer's goal is to maximize profits. This study tests the hypothesis that Bernoullian and lexicographic utility are more accurate predictors of farmer behavior than profit maximization. Six large California farms were used to test the hypothesis. After‐income tax E‐V (expectation‐variance) boundaries were developed for each farm and utility, and profit maximizing crop plans were determined for each. A goodness‐of‐fit criterion showed that Bernoullian utility formulations provided the greatest accuracy in predicting actual and planned crop patterns, followed by the lexicographic formulation. Profit maximization showed the poorest predictive power.