PRODUCT DIVERSIFICATION AND RISK AVOIDANCE: AN APPLICATION TO INDIAN AGRICULTURE

The phenomenon of multiple-output production has several explanations. Jointness, cost complementarities and risk avoidance, or a combination thereof, are the most likely. Jointness and cost complementarities are closely related concepts, both resting on the existence of an underlying fixed factor of production which is shared by more than one product. Risk avoidance can be another cause of jointness, in an economic sense, and an alternative explanation for product diversification. In this dissertation, the relationship between risk avoidance behavior and economic jointness is formally analyzed in the context of a multi-output technology. The implications in terms of the revenue function are examined and point to its subadditivity. We call this property "revenue complementarities", analogous to economies of scope of the cost function. The implications of both of these concepts for a new flexible form, the Constant Elasticity of Substitution, Constant Elasticity of Transformation, Generalized Leontief (CES-CET-GL), are laid out. A restricted CES-CET-GL profit function used to investigate a panel of agricultural production units in the Semi-Arid Tropics of rural India reveals the existence of cost complementarities as well as a considerable effect of risk aversion on profit maximizing behavior. The size and magnitude of the elasticities, estimated from a nonlinear system of output supply and input demand equations with fixed effects, show that farmers are responsive to price incentives, as predicted by neoclassical theory. Results indicate, among other things, that there is an overutilization of the quasi-fixed factor land, while the calculation of the shadow price of risk shows that risk averse behavior reduces the level of profits