Measuring Stochastic Technology: The Case of Tulare Milk Production

Abstract The flexible moment‐based approach to production analysis is used to measure the stochastic structure of large‐scale dairy production in Tulare County, California. This approach is flexible because it does not impose restrictions on the relationships between decision variables and the moments of the probability distribution of output. The parameter estimates support the hypothesis that second and third moments are functions of inputs and indicate that capital‐intensive dairies are riskier. The implied behavior of a risk‐averse dairy manager changed markedly when the effects of inputs on the skewness of the output distribution were included in a decision model.