Enterprise diversification has recently become a prominent feature of US dairy farms. Scope economies and risk aversion are two forces that simultaneously determine diversification. We jointly estimate scope economies and determine risk preferences under price uncertainty. We reject
risk neutrality in favour of Increasing Absolute Risk Aversion (IARA) and Increasing Relative Risk Aversion (IRRA). Scope economies are significant, but diminish with farm size. Increasing returns to scale exist in the production of multiple enterprises and diminish with size. Large farms
operate under decreasing returns to scale. Ignoring risk preferences, a common practice in empirical work, results in an underestimate of the effect of scope economies for large farms.
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Document Type: Research Article
Department of Food,Agricultural and Resource Economics, University of Guelph, GuelphON N1G 2W1, Canada
School of Economic Sciences,Washington State University, PullmanWA 99164-6210, USA
Publication date: 01 October 2011
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