Intertemporal Risk Management Decisions of Farmers under Preference, Market, and Policy Dynamics

government programs (Wang, et al., 1998), and crop revenue insurance, futures and government
programs (Zuniga, Coble, and Heifner, 2001; Wang, Makus, and Chen, 2004).

Studies on measuring farmers’ welfare change are found in literature, but very few
concentrate on farmers’ welfare changes under different risk management portfolios. Wang, et al
(1998) found Iowa corn farmers’ willingness-to-pay decreases as the trigger yield level of crop
insurance increases at a decreasing rate. Mahul (2003) found futures and options would improve
French wheat producers’ willingness-to-receive when hedging is used in the presence of crop
insurance. Wang, Makus and Chen (2004) found U.S. farm program payments account for the
primary value of all risk management portfolios for Pacific Northwest dryland grain producers.

Adaptation of the GEU framework specifically to agricultural risk management
portfolio studies is rarely found in the literature. Other possible applications of GEU, like
sensitivity analyses of dynamic optimization solutions with respect to a decision maker’s
preferences and other exogenous variables, have not been explored. No one has attempted
developing a welfare measure in GEU models. This paper will make an effort to contribute to the
literature from this perspective.

III. Model

Theoretical Framework

The foundation of the GEU model for intertemporal analysis builds on the independent
works of Epstein and Zin (1989, 1991), and Weil (1990). In this study we focus on Epstein and
Zin’s approach.

The representation of the general preference for a decision maker under risk can be
identified as:

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