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On Microeconomic Efficiency and Entrepreneurship under Bounded Rationality


  • Chavas, Jean-Paul

    (U of Wisconsin)

  • Barham, Bradford


We present a dynamic model of economic behavior of an owner-operated firm under bounded rationality, and develop the implications for the assessment of economic efficiency and the understanding of entrepreneurship. Under bounded rationality, information about technology and market conditions is not perfectly known, creating the possibility for learning. Uncertainty is represented using a general state-contingent approach. Efficiency analysis is explored using a certainty equivalent measure, which is the sum of three parts: expected net income, a conditional value of information, and a risk premium (measuring the implicit cost of private risk bearing). The analysis yields critical insights about the role of learning in technical efficiency, allocative efficiency, and their implications for an improved understanding of entrepreneurship. These insights also provide micro-theoretic grounding to some classic debates (e.g., Leibenstein and Stigler) about what contributes to efficiency and technological progress in an economy.

Suggested Citation

  • Chavas, Jean-Paul & Barham, Bradford, 2007. "On Microeconomic Efficiency and Entrepreneurship under Bounded Rationality," Staff Paper Series 516, University of Wisconsin, Agricultural and Applied Economics.
  • Handle: RePEc:ecl:wisagr:516

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    References listed on IDEAS

    1. D. S. Prasada Rao & Bart van Ark, 2013. "Introduction," Chapters,in: World Economic Performance, chapter 1, pages 1-6 Edward Elgar Publishing.
    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.
    3. Machina, Mark J, 1982. ""Expected Utility" Analysis without the Independence Axiom," Econometrica, Econometric Society, vol. 50(2), pages 277-323, March.
    4. Xavier Gabaix & David Laibson & Guillermo Moloche & Stephen Weinberg, 2006. "Costly Information Acquisition: Experimental Analysis of a Boundedly Rational Model," American Economic Review, American Economic Association, vol. 96(4), pages 1043-1068, September.
    5. Schultz, Theodore W, 1975. "The Value of the Ability to Deal with Disequilibria," Journal of Economic Literature, American Economic Association, vol. 13(3), pages 827-846, September.
    6. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    7. Quiggin, John & Chambers, Robert G, 2001. "The Firm under Uncertainty with General Risk-Averse Preferences: A State-Contingent Approach," Journal of Risk and Uncertainty, Springer, vol. 22(1), pages 5-20, January.
    8. Subal C. Kumbhakar, 2002. "Specification and Estimation of Production Risk, Risk Preferences and Technical Efficiency," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(1), pages 8-22.
    9. Chambers, Robert G. & Chung, Yangho & Fare, Rolf, 1996. "Benefit and Distance Functions," Journal of Economic Theory, Elsevier, vol. 70(2), pages 407-419, August.
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    JEL classification:

    • D2 - Microeconomics - - Production and Organizations


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