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ARS Home » Plains Area » Mandan, North Dakota » Northern Great Plains Research Laboratory » Research » Publications at this Location » Publication #354688

Title: Estimating economic efficiency under risk for agricultural cooperatives

item Pokharel, Krishna
item FEATHERSTONE, ALLEN - Kansas State University
item Archer, David

Submitted to: International Journal of Food and Agricultural Economics
Publication Type: Peer Reviewed Journal
Publication Acceptance Date: 4/1/2019
Publication Date: 4/1/2019
Citation: Pokharel, K.P., Featherstone, A.M., Archer, D.W. 2019. Estimating economic efficiency under risk for agricultural cooperatives. International Journal of Food and Agricultural Economics. 7:77-89.

Interpretive Summary: Agricultural cooperatives have faced challenges in recent years including risks due to price fluctuations and uncertain market conditions. To survive, it is important for cooperatives to be as efficient as possible when faced with risk, especially risk of losses or downside risk. Accounting for downside risk, the cost and revenue efficiencies for agricultural cooperatives in the United States were estimated. Results showed that efficiency may be underestimated if risk is not appropriately included in the estimates. This is important to managers of agricultural cooperatives in identifying ways to improve performance.

Technical Abstract: This study examined the impact of downside risk on cost efficiency (CE) and revenue efficiency (RE) for a sample of agricultural cooperatives. Downside risk is an appropriate measure of risk as it accounts for loss below the target return level regardless of individuals’ risk preference. The semi-variance of return on equity was used a measure of downside risk. CE and RE were estimated using data envelopment analysis (DEA) with traditional inputs and outputs and then re-estimated adjusting for downside risk. The average CE and RE scores were higher with the inclusion of downside risk than the scores with only traditional inputs and outputs. The DEA method without accounting for risk overestimates inefficiency and may misguide managers to improve performance.