Invariant Risk Preferences and Supply Response under Price Risk

Abstract

We develop a supply‐response model for producers with invariant preferences facing price risk and apply it empirically to sample data from Cretan olive‐oil producers. We estimate a Generalized Leontief cost function and use the price distribution historically faced by individual farmers to induce different representations of price risk that are consistent with the invariant preference structure. These different risk measures are combined with the estimated cost structure to provide distinct estimates of the risk‐efficient frontier faced by a representative producer with invariant risk preferences and to derive estimates of producer's generalized coefficients of risk aversion for different measures of price risk.