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Efficiency analysis under uncertainty: a simulation study

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  • Shankar, Sriram

Abstract

We model production technology in a state-contingent framework assuming that the firms maximize ex ante their preference function subject to stochastic technology constraint; in other words, firms are assumed to act rationally. We show that rational producers who face the same stochastic technology can make significantly different production choices. Further, we develop an econometric methodology to estimate the risk-neutral probabilities, efficiency scores and the parameters of stochastic technology when there are two states of nature and only one of which is observed. Finally, we simulate noiseless data based on our state-contingent specification of technology. Our state-contingent estimator recovers technology parameters and other economic quantities of interest without any error. But, when we apply conventional efficiency estimators to the simulated data, we obtain biased estimates of technical efficiency.

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  • Shankar, Sriram, 2015. "Efficiency analysis under uncertainty: a simulation study," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 59(2), April.
    • Handle: RePEc:ags:aareaj:280240
    DOI: 10.22004/ag.econ.280240
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    References listed on IDEAS

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    1. John Quiggin & Robert G. Chambers, 2006. "The state-contingent approach to production under uncertainty ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(2), pages 153-169, June.
    2. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August.
    3. Terrell, Dek, 1996. "Incorporating Monotonicity and Concavity Conditions in Flexible Functional Forms," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(2), pages 179-194, March-Apr.
    4. Shankar, Sriram, 2013. "Firm behaviour under uncertainty: a simple parametric model," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 57(1), pages 1-11.
    5. Chambers,Robert G. & Quiggin,John, 2000. "Uncertainty, Production, Choice, and Agency," Cambridge Books, Cambridge University Press, number 9780521622448.
    6. Sriram Shankar & John Quiggin, 2013. "Production under uncertainty: a simulation study," Journal of Productivity Analysis, Springer, vol. 39(3), pages 207-215, June.
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    Cited by:

    1. Alghalith, Moawia, 2016. "A note on the theory of the firm under multiple uncertainties," European Journal of Operational Research, Elsevier, vol. 251(1), pages 341-343.
    2. Zheng, Hongyun & Ma, Wanglin & Wang, Fang & Li, Gucheng, 2021. "Does internet use improve technical efficiency of banana production in China? Evidence from a selectivity-corrected analysis," Food Policy, Elsevier, vol. 102(C).

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