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An Investigation of the Relationship Between Constraint Omission and Risk Aversion in Firm Risk Programming Models

Published online by Cambridge University Press:  05 September 2016

Wesley N. Musser ,
Bruce A. McCarl  and
G. Scott Smith
Wesley N. Musser
Affiliation:
Department of Agricultural and Resource Economics, Oregon State University
Bruce A. McCarl
Affiliation:
Department of Agricultural Economics, Texas A & M University
G. Scott Smith
Affiliation:
Department of Agricultural Economics, University of Georgia
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Abstract

A model with omitted resource constraints is suggested as an alternative to a risk aversion model for explaining economic behavior. This paper uses two standard mathematical programming models to further explore this issue. One model is a standard profit maximization linear programming model and the other is a risk averse quadratic programming model with part of the constraints deleted. Theoretical investigation of these models demonstrates that risk aversion can substitute for omitted resource constraints. A small empirical model is then solved under both formulations. With resource constraints deleted, positive risk aversion is necessary to obtain a similar enterprise organization as under profit maximization with complete constraints. These two solutions are then interpreted with the theoretical optimality conditions.

Keywords

riskmathematical programmingoptimal enterprise organization
Type
Submitted Articles
Information
Journal of Agricultural and Applied Economics , Volume 18 , Issue 2 , December 1986 , pp. 147 - 154
Copyright
Copyright © Southern Agricultural Economics Association 1986

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