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Abstract
This paper examines the impact of 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 measure. Downside risk was defined as the percent of years in which a farm’s net farm income did not cover unpaid family and operator labour. Comparisons were made with and without a change in efficiency when each farm’s downside risk measure 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 measures.