Production Under Uncertainty: A Simulation Study
AbstractIn 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 InfoPaper provided by Risk and Sustainable Management Group, University of Queensland in its series Risk & Uncertainty Working Papers with number WPR10_3.
Date of creation: Dec 2010
Date of revision:
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CES; Cobb-Douglas; OLS; output-cubical; risk-neutral; state-allocable; state-contingent;
Other versions of this item:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- Q10 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - General
This paper has been announced in the following NEP Reports:
- NEP-AGR-2011-01-16 (Agricultural Economics)
- NEP-ALL-2011-01-16 (All new papers)
- NEP-ECM-2011-01-16 (Econometrics)
- NEP-EFF-2011-01-16 (Efficiency & Productivity)
- NEP-ORE-2011-01-16 (Operations Research)
- NEP-UPT-2011-01-16 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Chris OÕDonnell & Robert G. Chambers & John Quiggin, . "Efficiency analysis in the presence of uncertainty," Risk & Uncertainty Working Papers WP2R06, Risk and Sustainable Management Group, University of Queensland.
- 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.
- Chris O'Donnell & W.E. Griffiths, 2004. "Estimating State-Contingent Production Frontiers," CEPA Working Papers Series WP022004, School of Economics, University of Queensland, Australia.
- C.J. O'Donnell & W.E. Griffiths, 2004. "Estimating State-Contingent Production Frontiers," Department of Economics - Working Papers Series 911, The University of Melbourne.
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