Faced with risky yields and returns, risk-averse farmers require a premium to take risks. In this paper, we estimate individual farmers’ degrees of risk aversion to adjust for the risk premium in returns and to replace the farmers’ realized returns with their certainty equivalent returns in the production function. In that way, the effect of the inputs on returns will automatically be risk-adjusted, i.e., we obtain risk-adjusted marginal effects of inputs, which can be used in decision-making support of farmers’ input choices in production. Using farm-level data from organic basmati rice smallholders in India, we illustrate this method using nonparametric production functions. The results show that the input elasticities and returns-to-scale estimates change when the farmers’ degree of risk aversion is taken into consideration.

Landowners can engage in voluntary conservation with the help of incentive programs. Recommended conservation practices are selected based on management intentions as well as the contribution of those practices to the overall net returns. However, conservation motives are heterogeneous and based on individual risk behavior. Existing cost-share programs might either under-fund or over-fund conservation, which could lead to inefficient management of natural resources. The current analysis evaluates the economic feasibility of variable cover crop strategies, multiple seeding rates, within a soybean production system in silt loam and clay soils. The study utilizes stochastic efficiency with respect to a function, referred to as SERF, for determining the preferred strategies under various risk preferences. The SERF method accounts for the heterogeneity of individual decision-making with regards to conservation adoption. Results indicate that most risk-averse farmers chose tillage radish with medium seeding rate as their preferred strategy. However, as the risk-bearing capacity of an individual increases, the current level of incentives does not motivate to implement conservation. The most preferred plan for risk-neutral farmers is the fallow system in both silt loam and clay soils. The economic and risk assessment framework can improve understanding of the temporal dynamics of different practices and inform policy on conservation structure that promotes agricultural systems that are economically, environmentally, and socially sustainable.

Weed-suppressive rice cultivars have the potential to reduce heavy reliance on synthetic herbicides in rice production. However, the economics of using weed-suppressive rice cultivars in conventional rice systems have not been fully evaluated. This study uses simulation and stochastic efficiency with respect to a function to rank weed-suppressive and weed-nonsuppressive rice cultivars under alternative herbicide intensity levels based on their certainty equivalents mapped across increasing levels of absolute risk aversion. The results indicate risk-averse rice producers would prefer to grow weed-suppressive cultivars using less herbicide inputs than what would be used to grow weed-nonsuppressive rice cultivars.

This work concerns Markov decision chains on a finite state space. The decision-maker has a constant and nonnull risk sensitivity coefficient, and the performance of a control policy is measured by two different indices, namely, the discounted and average criteria. Motivated by well-known results for the risk-neutral case, the problem of approximating the optimal risk-sensitive average cost in terms of the optimal risk-sensitive discounted value functions is addressed. Under suitable communication assumptions, it is shown that, as the discount factor increases to 1, appropriate normalizations of the optimal discounted value functions converge to the optimal average cost, and to the functional part of the solution of the risk-sensitive average cost optimality equation.

Interactions among the nitrogen (N) fertilization rate, N source, and disease severity can affect mean yield and yield variance in conservation tillage wheat production. A Just-Pope model was used to evaluate the effects of N rate, N source, and disease on the spring N-fertilization decision. Ammonium nitrate (AN) was the utility-maximizing N source, regardless of risk preferences. The net-return-maximizing AN rate was 92 lb N/acre, providing $0.52/acre higher net returns than the best alternative N source (urea). If a farmer could anticipate a higher-than-average Take-All Root Rot infection, the difference in optimal net returns between AN and urea would increase to $35.11/acre.

A risk-averse irrigated corn producer would be better off choosing the more expensive subsurface drip irrigation (SDI) over center-pivot sprinkler (CPS), given limited aquifer life and swine effluent and urea fertilization. A stochastic optimization using EPIC data maximized expected utility of 100 years' worth of net revenues for a quarter section. Phosphorus accumulation was more likely with the CPS than with the SDI but soil nitrogen was constant under both systems. SDI conserves more water than CPS per acre but depletes the aquifer faster because a greater area is irrigated. These results were invariant in the sensitivity analysis.

We study an asset allocation problem for a defined-contribution (DC) pension scheme in its accumulation phase. We assume that the amount contributed to the pension fund by a pension plan member is coupled with the salary income which fluctuates randomly over time and contains both a hedgeable and non-hedgeable risk component. We consider an economy in which macroeconomic risks are existent. We assume that the economy can be in one of I states (regimes) and switches randomly between those states. The state of the economy affects the dynamics of the tradeable risky asset and the contribution process (the salary income of a pension plan member). To model the switching behavior of the economy we use a counting process with stochastic intensities. We find the investment strategy which maximizes the expected exponential utility of the discounted excess wealth over a target payment, e.g. a target lifetime annuity.