PRODUCT DIVERSIFICATION AND ATTITUDES TOWARD RISK IN AGRICULTURAL PRODUCTION

In this article we analyze the relationship between risk-avoidance beh avior and economic jointness in a multi-output agricultural technology . We focus on farmer specific heterogeneity in attitudes towards risk- taking, while treating production uncertainty as unobserved stochastic error that is common to all region specific farms. We furthermore uti lize a new flexible functional form, the Constant Elasticity of Transf ormation, Constant Elasticity of Substitution, Generalized Leontief (B ehrman, Lovell, Pollak, and Sickles, [1992]) which has the appealing p roperty of relative flexibility while ensuring proper curvature proper ties of the estimated multi-output technology over a larger sample reg ion of the price/quantity space than a flexible form such as the Gener alized Leontief [Diewert, 1971]. Our empirical study deals with small- scale agriculture in the Indian Semi-Arid Tropics (SAT), partly becaus e of the importance of yield-related risk in this region, but also bec ause we have measures of farmer specific risk attitudes in the SAT dat a. Our modeling approach allows for the calculation of the shadow cost of farmer specific risk attitudes in terms of foregone profits, while at the same time controlling for the technical factors that give rise to multi-output production in the absence of risk. We are thus able t o estimate these opportunity costs while modeling a multiple output te chnology in which cost complementarities can lead to diversified produ ction and in which joint production is not always undertaken.