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Separability of stochastic production decisions from producer risk preferences in the presence of financial markets

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  • Chambers, Robert G.
  • Quiggin, John

Abstract

This paper presents a unified treatment of the production and financial decisions available to a firm facing frictionless financial markets and a stochastic production technology under minimal assumptions on the firm's stochastic technology and objective function. The specific focus is on separation results for stochastic technologies, that is, on conditions under which the optimal production decision may be determined without regard to the risk preferences of the firm's owners. Necessary and sufficient conditions for separation, which generalize existing results, are presented. We show, among other results, that separation implies that the linear pricing of assets in the span of the market can be extended to encompass sets of assets outside of the span that are not perfectly replicable.

Suggested Citation

  • Chambers, Robert G. & Quiggin, John, 2003. "Separability of stochastic production decisions from producer risk preferences in the presence of financial markets," Risk and Sustainable Management Group Working Papers 150348, University of Queensland, School of Economics.
    • Handle: RePEc:ags:uqsers:150348
    DOI: 10.22004/ag.econ.150348
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    Cited by:

    1. Robert G. Chambers & Daniel C. Voica, 2017. "“Decoupled” Farm Program Payments are Really Decoupled: The Theory," American Journal of Agricultural Economics, John Wiley & Sons, vol. 99(3), pages 773-782, April.
    2. Chambers, Robert G. & Quiggin, John, 2008. "Narrowing the no-arbitrage bounds," Journal of Mathematical Economics, Elsevier, vol. 44(1), pages 1-14, January.
    3. Voica, Daniel C. & Wimmer, Stefan G., "undated". "The Production Effects of Crop Diversification Requirements under the European Union Greening Policy," 2018 Annual Meeting, August 5-7, Washington, D.C. 273874, Agricultural and Applied Economics Association.
    4. Daniel Voica & Stefan Wimmer, 2018. "The Production Effects of Crop Diversification Requirements Under the European Union Greening Policy," Discussion Papers 1802, School of Economics and Finance, Massey University, New Zealand.
    5. 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.
    6. Voica, Daniel C., 2014. "Are Subsidies Decoupled from Production in the Presence of Incomplete Financial Markets?," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 169788, Agricultural and Applied Economics Association.
    7. Voica, Daniel C., "undated". "The Effect of the Single Farm Payment Timing on Production Incentives," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258024, Agricultural and Applied Economics Association.

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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