Productivity and Producer Welfare in the Presence of Production Risk

Authors

  • Luis Orea,

  • Alan Wall

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    •  Luis Orea and Alan Wall are members of the Oviedo Efficiency Group at the Department of Economics, Faculty of Economics and Business, University of Oviedo, Oviedo, Spain. E-mail: awall@uniovi.es for correspondence. The authors are grateful for suggestions from the Managing Editor and for the comments of two anonymous referees, which greatly improved earlier drafts of the article.


Abstract

Production risk is an inherent characteristic of agriculture and changes in production risk will affect the welfare of risk-averse producers. Using standard concepts from the literature on uncertainty, we introduce a welfare measure which comprises total factor productivity (TFP), production risk and farmer risk preferences, and which reflects the impact on producer welfare of changes in production technology. An empirical application is carried out using data from a sample of Spanish dairy farms which shows how the positive impact of increases in TFP on welfare can be offset by increases in the risk premium (‘cost of risk’) to the point where welfare may decrease.

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