Cost Function Estimation under Risk Aversion

Standard definitions of the cost function do not admit risk. Standard (ex post) approaches to cost function estimation yield biased and inconsistent estimates when production is stochastic. Recently an (ex ante) approach to cost function estimation with stochastic production has been developed by imbedding the distance function in the cost function estimation problem. We generalize the approach to consider risk aversion in decision making. Only two empirical studies have considered stochastic production in cost function estimation. Both have required constant returns to scale. We demonstrate a methodology sufficiently general to consider nonconstant returns to scale. Copyright 1998, Oxford University Press.