COST FUNCTION ESTIMATION UNDER RISK-AVERSION

Standard definitions of the cost function do not admit risk. Standard (ex post) approaches to cost function estimation yield biased and inco nsistent estimates when production is stochastic. Recently an (ex ante ) approach to cost function estimation with stochastic production has been developed by imbedding the distance function in the cost function estimation problem. We generalize the approach to consider risk avers ion in decision making. Only two empirical studies have considered sto chastic production in cost function estimation. Both have required con stant returns to scale. We demonstrate a methodology sufficiently gene ral to consider nonconstant returns to scale.