Modeling production risk with a two-step procedure

This study deals with modeling of production risk by means of a two-step pr ocedure. In contrast td earlier studies of production risk, we do not immed iately adopt restrictive functional forms for the risky production technolo gy. We first test for the presence of production risk. If production risk i s found to be present, the mean and risk functions are estimated separately . This allows the use of more flexible functional forms for both the mean a nd the risk functions than commonly found in the literature. An empirical a pplication to Norwegian salmon farming, where restrictive specifications of the technology are rejected, demonstrates the validity of our approach. Pr esence of production risk in many primary production sectors implies that t his approach should be considered in productivity studies.