Risk Preferences, Production Risk and Firm Heterogeneity*

TLDR: In this paper, a new technique is proposed for deriving the risk preference function under production risk and expected utility of profit maximization, which depends on neither a specific parametric form of the utility function nor any distribution of the error term representing production risk.

Abstract: A new technique is proposed for deriving the risk preference function under production risk and expected utility of profit maximization. The derivation depends on neither a specific parametric form of the utility function nor any distribution of the error term representing production risk. The proposed risk preference function is flexible enough to test different types of risk behavior and symmetry of the output distribution. Furthermore, our production risk specification allows for inputs with positive and negative marginal risk. The econometric model accommodates production risk, risk preferences and firm heterogeneity simultaneously. Norwegian salmon farming data are used as an application.