RICE, RISK AND RATIONALITY: EXPLORATIONS IN SUPPLY RESPONSE IN BANGLADESH
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Most studies on rational response of rice producers in less developed countries (LDCs) assume risk neutrality. However, the role of risk in farmers's decision making has been recognised as an important determinant of production. If farmers are rational and risk averse in less developed countries (LDCs) they should consider not only expected output prices and yields when allocating resources, but also expected risk in output prices and yields. The extent to which price and yield risks do in fact affect producer decisions is an important empirical question. In this paper, we review the literature on risk & supply response in agriculture of LDCs. Next, we develop single equation as well as a system of equations model to estimate supply under risky conditions when agents are rational. A rational expectation model incorporating risk variables is presented. Then, we apply the models to a LDC (Bangladesh) and estimate the validity of the models.