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Efficiency analysis in the presence of uncertainty

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  • O'Donnell, Chris
  • Chambers, Robert G.
  • Quiggin, John

Abstract

In a stochastic decision environment, differences in information can lead rational decision makers facing the same stochastic technology and the same markets to make different production choices. Efficiency and productivity measurement in such a setting can be seriously and systematically biased by the manner in which the stochastic technology is represented. For example, conventional production frontiers implicitly impose the restriction that information differences have no effect on the way risk-neutral decision makers utilize the same input bundle. The result is that rational and efficient ex ante production choices can be mistakenly characterized as inefficient -- informational differences are mistaken for differences in technical efficiency. This paper uses simulation methods to illustrate the type and magnitude of empirical errors that can emerge in efficiency analysis as a result of overly restrictive representations of production technologies.

Suggested Citation

  • O'Donnell, Chris & Chambers, Robert G. & Quiggin, John, 2006. "Efficiency analysis in the presence of uncertainty," Risk and Sustainable Management Group Working Papers 151176, University of Queensland, School of Economics.
    • Handle: RePEc:ags:uqsers:151176
    DOI: 10.22004/ag.econ.151176
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    References listed on IDEAS

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    More about this item

    Keywords

    Risk and Uncertainty;

    JEL classification:

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

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