Abstract

Risk preferences broadly affect many economic decisions when markets are incomplete. Common representations of risk preferences are constant absolute, relative, and partial relative risk aversion. Each of these preference classes has distinct impacts on choice. An econometric test for distinguishing the class of preferences i proposed and implemented for potato supply response in Idaho. The data reject constant absolute and partial relative risk aversion and are congruent with constant relative risk aversion. Key words: risk, risk preferences, upply response. The model of the price-uncertain, competitive, single-product firm has received much attention in a wide variety of theoretical analyses (e.g., Sandmo, Katz, Briys and Eeckhoudt, Ishii, Hey, Chavas and Pope). A rather complete set of the-oretical restrictions has emerged which depends crucially on risk preferences. Three classes emerge as important benchmarks: constant ab-solute risk aversion (CARA), constant relative risk aversion (CRRA), and constant partial rel-ative ¡ aversion (CPRRA). These three classes are important not only for null hypotheses from which to accept (or reject) rising or falling risk aversion but are important in their own right. For example, these three classes imply, respec-tively, (a) changes in the location of initial wealth do not alter decisions, (b) changes in the scale of wealth do not affect decisions, and (c) changes in profit or the scale of the bet do not alter de-cisions. Each of these implications has impor-tant ramifications. For example, CARA is cru-cial to exact welfare analysis (Pope, Chavas, and Just), while CRRA implies that a proportional wealth tax or wealth sharing does not alter de-cisions. For CPRRA, the scale of, or the exis-tence of, profit sharing or tax would not affect decisions (Pope). In addition to this conceptual work, a grow-ing body of empirical work has found evidence of risk aversion and risk response. This includes both firm-level and aggregate analysis (compare