PR - Risk Adjusted Cost Efficiency Indices

This paper examines the impact of downside risk on cost efficiency for a sample of farms. Cost efficiency was estimated using traditional input and output measures, and then re-estimated including each farm’s downside risk score. Comparisons were made with and without a change in efficiency when each farm’s downside risk score was included in the analysis. As expected, downside risk plays an important role in explaining farm inefficiency. Failure to account for downside risk overstates inefficiency, particularly for farms with low downside risk scores.

Keywords: benchmarks, cost efficiency, downside risk