Article
Land Allocation in the Presence of Estimation Risk
Journal of Agricultural and Resource Economics
Document Type
Article
Disciplines
Publication Date
7-1-1995
Abstract
Estimation risk occurs when parameters relevant for decision making are uncertain. Bayes' criterion is consistent with expected-utility maximization in the presence of estimation risk. This article examines optimal (Bayes') land allocations and land allocations obtained using the traditional plug-in approach and two alternative decision rules. Bayes' allocations are much better economically than the other allocations when there are few sample observations relative to activities. Calculation of certainty equivalent returns (CERs) with estimation risk is also discussed and illustrated. CERs are typically (and incorrectly) calculated with the plug-in approach. Plug-in CERs may be extremely misleading.
Copyright Owner
Western Agricultural Economics Association
Copyright Date
1995
Language
en
File Format
application/pdf
Citation Information
Sergio H. Lence and Dermot J. Hayes. "Land Allocation in the Presence of Estimation Risk" Journal of Agricultural and Resource Economics Vol. 20 Iss. 1 (1995) p. 49 - 62 Available at: http://works.bepress.com/sergio_lence/2/
This article is from Journal of Agricultural and Resource Economics 20, no. 1 (1995) 49–63.