Risk Preference Estimation in the Nonlinear Mean Standard Deviation Approach

Abstract

Risk preferences and technology are jointly estimated in the nonlinear mean-standard deviation framework for a competitive firm model under price risk. A utility function is proposed that nests various risk preference structures and risk neutrality as empirically refutable special cases. The empirical application using firm-level data finds evidence of decreasing absolute risk aversion, differences in the nature of relative risk aversion by firm size, and little support for the widely used linear mean-variance framework. The estimation results also show that ignoring risk and risk preferences can substantially overestimate output supply and input demand elasticities.

JEL Classification: D81