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Abstract
The production literature has shown that inputs such as fertilizer can be defined as risk-increasing.
However, farmers also consistently overapply nitrogen. A model of optimal
input use under uncertainty is used to address this paradox. Using experimental data, a
stochastic production relationship between yield and soil nitrate is estimated. Numerical
results show that input uncertainty may cause farmers to overapply nitrogen. Survey data
suggest that farmers are risk averse, but prefer small chances of high yields compared to
small chances of crop failures when expected yields are equivalent. Furthermore, yield
risk and yield variability are not equivalent.