Production Risk and the Estimation of Ex-ante Cost Functions
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The Department of Economic Science was founded in 1898 to teach economic theory as a truth of industrial life, and was very much concerned with applying economics to business and industry, particularly agriculture. Between 1910 and 1967 it showed the growing influence of other social studies, such as sociology, history, and political science. Today it encompasses the majors of Agricultural Business (preparing for agricultural finance and management), Business Economics, and Economics (for advanced studies in business or economics or for careers in financing, management, insurance, etc).
History
The Department of Economic Science was founded in 1898 under the Division of Industrial Science (later College of Liberal Arts and Sciences); it became co-directed by the Division of Agriculture in 1919. In 1910 it became the Department of Economics and Political Science. In 1913 it became the Department of Applied Economics and Social Science; in 1924 it became the Department of Economics, History, and Sociology; in 1931 it became the Department of Economics and Sociology. In 1967 it became the Department of Economics, and in 2007 it became co-directed by the Colleges of Agriculture and Life Sciences, Liberal Arts and Sciences, and Business.
Dates of Existence
1898–present
Historical Names
- Department of Economic Science (1898–1910)
- Department of Economics and Political Science (1910-1913)
- Department of Applied Economics and Social Science (1913–1924)
- Department of Economics, History and Sociology (1924–1931)
- Department of Economics and Sociology (1931–1967)
Related Units
- College of Agricultural and Life Sciences (parent college)
- College of Liberal Arts and Sciences (parent college)
- College of Business (parent college)
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Abstract
Following the pioneering work of Shephard (1953), Diewert (1971) and McFadden (1978), the cost function approach has proven very useful and popular in applied production studies. Insofar as the hypothesis of cost minimization is correct, estimating a cost function is usually deemed preferable to estimating a primal specification of the technology because, by using input prices instead of input quantities on the right-hand side of estimating equations, one removes a potential source of simultaneous equation bias. Specifically, in the cost function framework input choices are modeled as a function of input prices and the output level. But, as emphasized in the recent article by Pope and Just (1996), a problem then arises when the , production technology is inherently stochastic. Such a case is very important in agricultural and environmental production models, where climatic and pest factors outside of the producer's control affect realized output in a nontrivial fashion. When producers make their input choices prior to the resolution of this production uncertainty, then the standard cost function specification (which is conditional on realized output level) is not relevant.