Risk Response In Agriculture
Crop production is subject to supply shocks, and both expected and realized outputs as well as output prices are unknown when inputs are chosen. The process by which producers form expectations is difficult to model, especially when working with aggregate data. The authors present a necessary and sufficient condition on cost and technology to allow variable input demand equations to be specified as functions of input prices, quasi-fixed inputs, and total variable cost. These all are observable when inputs are committed to production, so that ex ante demands can be estimated with observable data.