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Production Under Uncertainty: A Simulation Study

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  • Sriram Shankar

    () (School of Economics, University of Queensland)

  • Chris O'Donnell

    () (School of Economics, University of Queensland)

  • John Quiggin

    () (School of Economics, University of Queensland)

Abstract

In this article we model production technology in a state-contingent framework. Our model analyzes production under uncertainty without being explicit about the nature of producer risk preferences. In our model producers’ risk preferences are captured by the risk-neutral probabilities they assign to the different states of nature. Using a state-general state-contingent specification of technology we show that rational producers who encounter the same stochastic technology can make significantly different production choices. Further, we develop an econometric methodology to estimate the risk-neutral probabilities and the parameters of stochastic technology when there are two states of nature and only one of which is observed. Finally, we simulate data based on our state-general state-contingent specification of technology. Biased estimates of the technology parameters are obtained when we apply conventional ordinary least squares (OLS) estimator on the simulated data.

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Bibliographic Info

Paper provided by Risk and Sustainable Management Group, University of Queensland in its series Risk & Uncertainty Working Papers with number WPR10_3.

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Date of creation: Dec 2010
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Handle: RePEc:rsm:riskun:r10_3

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Keywords: CES; Cobb-Douglas; OLS; output-cubical; risk-neutral; state-allocable; state-contingent;

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  1. Christopher O’Donnell & Robert Chambers & John Quiggin, 2010. "Efficiency analysis in the presence of uncertainty," Journal of Productivity Analysis, Springer, vol. 33(1), pages 1-17, February.
  2. C. J. O'Donnell & W. E. Griffiths, 2006. "Estimating State-Contingent Production Frontiers," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(1), pages 249-266.
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