UNCERTAINTY, DUALITY AND PERVERSITY - AN EMPIRICAL-TEST OF THE SCHULTZ-BARON HYPOTHESIS

It has been suggested that supply curves may be negatively sloped unde r conditions of output price uncertainty and risk aversion if the effe ct of an increase in expected price is offset by the effect of an asso ciated increase in uncertainty/risk. This hypothesis, first articulate d by Schultz and given a more rigorous theoretical exposition by Baron , is tested using aggregate time series data to estimate a stochastic model of US agriculture based on a generalized Leontief certainty equi valent profit function. Evidence of risk aversion and a positive corre lation between mean output price and its variance are found; however, these factors are not strong enough to generate perversity. Thus the o wn-price elasticity of supply of agricultural output is found to be po sitive with a value of 0.25. Although no evidence of perversity is fou nd, the empirical results suggest that ignoring price uncertainty may bias estimates of aggregate supply response downwards by between 5% an d 47%. As well as testing the Schultz-Baron hypothesis, the paper demo nstrates how the dual approach to applied production analysis can be e xtended to cover production under output price uncertainty.