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Title: Modelling agricultural risk in a large scale positive mathematical programming model

Authors: Iván Arribas; Kamel Louhichi; Angel Perni; José Vila; Sergio Gómez-y-Paloma

Addresses: Department of Economic Analysis, Ivie and ERICES, University of Valencia, Avda. de los Naranjos s/n., Edificio Departamental Oriental, Valencia, 46022, Spain ' European Commission, Joint Research Centre, Edificio Expo. C/Inca Garcilaso, Seville, 41092, Spain; INRA-UMR Économie Publique, Thiverval-Grignon, France ' European Commission, Joint Research Centre, Edificio Expo. C/Inca Garcilaso, Seville, 41092, Spain ' Department of Economic Analysis and ERICES, University of Valencia, Avda. de los Naranjos s/n., Edificio Departamental Oriental, Valencia, 46022, Spain ' European Commission, Joint Research Centre, Edificio Expo. C/Inca Garcilaso, Seville, 41092, Spain

Abstract: Mathematical programming has been extensively used to account for risk in farmers' decision making. The recent development of the positive mathematical programming (PMP) has renewed the need to incorporate risk in a more robust and flexible way. Most of the existing PMP-risk models have been tested at farm-type level and for a very limited sample of farms. This paper presents and tests a novel methodology for modelling risk at individual farm level in a large scale model, called individual farm model for common agricultural policy analysis (IFM-CAP). Results show a clear trade-off between including and excluding the risk specification. Albeit both alternatives provide very close estimates, simulation results shows that the explicit inclusion of risk in the model allows isolating risk effects on farmer behaviour. However, this specification increases three times the computation time required for estimation.

Keywords: agriculture; PMP; positive mathematical programming; risk and uncertainty; expected utility; highest posterior density; European common agricultural policy.

DOI: 10.1504/IJCEE.2020.104136

International Journal of Computational Economics and Econometrics, 2020 Vol.10 No.1, pp.2 - 32

Received: 24 Feb 2017
Accepted: 27 Nov 2017

Published online: 18 Dec 2019 *

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