LAND ALLOCATION IN THE PRESENCE OF ESTIMATION RISK

Estimation risk occurs when parameters relevant for decision making ar e uncertain. Bayes' criterion is consistent with expected-utility maxi mization in the presence of estimation risk. This article examines opt imal (Bayes') land allocations and land allocations obtained using the traditional plug-in approach and two alternative decision rules. Baye s' allocations are much better economically than the other allocations when there are few sample observations relative to activities. Calcul ation of certainty equivalent returns (CERs) with estimation risk is a lso discussed and illustrated. CERs are typically (and incorrectly) ca lculated with the plug-in approach. Plug-in CERs may be extremely misl eading.