The Role of Farmers ’ Risk Aversion for Contract Choice: A Neglected Aspect of Regulatory Proposals∗

In this paper we estimate the farmers ’ side welfare effects of a hypothetical regula-tory scenario that would partially eliminate production contracts in the swine industry. Using the Agricultural Resource Management Survey (ARMS) data for 2004, farmers’ production costs under different marketing arrangements are estimated and then used to recover their individual risk aversion parameters with the help of a structural ex-pected profit maximization model. The results show that farmers who use production contracts are more risk averse than farmers who use spot markets or marketing con-tracts. The regulation that forces producers to market their hogs in a riskier marketing channel relative to the channel they themselves selected imposes large welfare losses on the affected farmers