Participation in Farm Commodity Programs: A Stochastic Dominance Analysis: Comment

Abstract

In a 1981 Journal article, Kramer and Pope (KP) examine benefits of participation in farm commodity programs using a normative risk model based on stochastic dominance theory. It will be shown here that absolute risk aversion coefficients which they use are not applicable to their data set. KP state in their footnote to table 3 that the rankings are for returns in thousands of dollars (p. 125). They state (p. 124) values in table I were selected so as to cover range of risk aversion coefficients reported in previous studies. They apparently scaled down their net returns (table 2, p. 124) by a factor of 1,000 before carrying out stochastic dominance calculations, and this led to use of inappropriate boundaries for their absolute risk aversion coefficients. They present absolute risk aversion coefficients ranging from -0.04 to 0.03 for 12 groups of decision makers. These risk aversion coefficients enclose a degree of risk aversion which is not likely to be applicable to decision makers considering distributions of possible returns for representative Kern County farms. The absolute risk aversion coefficients used