Indirect Utility Maximization under Risk: A Heterogeneous Panel Application

The curvature properties of the indirect utility function imply a set of refutable implications in the form of comparative static results and symmetric relations for the competitive firm operating under uncertainty. These hypotheses, first derived and empirically tested under output price uncertainty by Saha and Shumway (1998), are extended in this article to the more general case of both price and quantity uncertainty and result in an important theoretical finding. Using recently developed techniques for testing unit root and cointegration in heterogeneous panels, we develop a model of U.S. agricultural production based on the time series properties of a panel of state-level data and contrast test implications with those resulting from a traditional model that presumes stationarity in all variables. Although differing in specific outcomes, the empirical tests of the refutable hypotheses render the same conclusions for both models: we fail to reject most refutable hypotheses under output price and output quantity risk, symmetry conditions implied by a twice-continuously-differentiable indirect utility function are rejected, two restrictive risk preference hypotheses are also rejected, and, at individual observations, data are generally consistent with most (but not all) of the hypotheses implied by individual states acting as though they were expected utility-maximizing firms.