Title: Resource Allocation and Welfare with Risky Production
Abstract: This paper presents two propositions about the effects of risky production in an economy. The essential features of risky production in the present context are that output levels are uncertain and that factor-employment decisions precede the resolution of uncertainty. The best examples are in agriculture where there are inherent lags in the production process and where yields are subject to stochastic disturbances owing to disease and climatic factors. The two propositions are (a) risky production in one sector of an shifts resources from that sector, and (b) it may create welfare gains but is certain to create greater losses; the distributional effects favor agents whose factor portfolios are weighted more heavily with the factor used intensively in the stable sector. All of these results depend on the convexity of consumer preferences-on von Neuman-Morgenstern risk aversion-and are straightforward and intuitive. At points they agree with previous findings but rest on less qualification than the latter. At other points these propositions conflict with previous claims. In these cases a brief explanation is offered. Previous research on this subject is extensive. Much of it has focussed on the effects of establishing stockpiles to stabilize commodity prices and consumption streams. Most studies in this vein have adopted a partial-equilibrium framework in the tradition of B. F. Massell [6]. The limitations of this framework are well-known [7]. Most of them have been overcome in B. D. Wright's treatment of ideal production stabilization [10], but it is inevitable that partial-equilibrium analysesWright's included-cannot reveal all the consequences of risky production. For this a general-equilibrium analysis is needed. General-equilibrium approaches to the subject of resource allocation under risk have been provided by, among others, T. J. Rothenberg and K. R. Smith [8], R. N. Batra [2] and R. Britto [3]. All of these studies are conducted in the familiar framework of two competitive production sectors using two factors inelastically supplied and constant returns to scale. Rothenberg and Smith and Batra adopt the small open economy assumption that product prices are fixed and exogenous; Britto allows endogenous price adjustments to risk. Besides this the studies differ in ad hoc assumptions about firms' attitudes toward
Publication Year: 1983
Publication Date: 1983-10-01
Language: en
Type: article
Indexed In: ['crossref']
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Cited By Count: 9
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