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European Review of Agricultural Economics 2004 31(3):273-287; doi:10.1093/erae/31.3.273
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European Review of Agricultural Economics vol. 31 no. 3 © Oxford University Press and Foundation for the European Review of Agricultural Economics 2004; all rights reserved

Toward exploring the location-scale condition: a constant relative risk aversion location-scale objective function

Carl H. Nelson

University of Illinois at Urbana–Champaign, Urbana, IL, USA

Cesar Escalante

University of Georgia, Athens, GA, USA

Received June 2004;

Summary

A constant relative risk aversion (CRRA) location-scale function is derived, analysed, and demonstrated for modelling choice under uncertainty. The function contributes to further exploration of the location-scale condition in agricultural economics risk research. Such analysis has been infrequent in recent research because the well-known linear mean-variance function implicitly assumes constant absolute risk aversion (CARA). Examples demonstrate that the CARA meanvariance function produces substantially different results than the CRRA locationscale function. Further, the CRRA location-scale function produces results similar to direct expected utility maximisation with a CRRA utility function and normally distributed returns.

Keywords: location-scale condition, mean-variance analysis, constant relative risk aversion


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