Empirical estimation of production risk using a cost function with panel data

Abstract

The purposes of this study are twofold. First, it extends production risk from a production function to a more general cost function. The theoretical model is able to account for the effects of risk on a firm`s minimum cost and optimal input demands. Second, the present paper provides an estimable framework for an analysis of the impacts of the risk on firm behaviour. Employing the model to Taiwan`s electronics and information industry, it is found that production risk appears to play an important role in production cost. Evidence is found that the vast majority of sample firms belong to risk-averters.