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Enterprise diversification in US dairy: impact of risk preferences on scale and scope economies

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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

Affiliations: 1: Department of Food,Agricultural and Resource Economics, University of Guelph, GuelphON N1G 2W1, Canada 2: School of Economic Sciences,Washington State University, PullmanWA 99164-6210, USA

Publication date: 01 October 2011

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