Estimating State-Contingent Production Frontiers
Chambers and Quiggin (2000) advocate the use of state-contingent production technologies to represent risky production and establish important theoretical results concerning producer behaviour under uncertainty. Unfortunately, perceived problems in the estimation of state-contingent models have limited the usefulness of the approach in policy formulation. We show that fixed and random effects state-contingent production frontiers can be conveniently estimated in a finite mixtures framework. An empirical example is provided. Compared to standard estimation approaches, we find that estimating production frontiers in a state-contingent framework produces significantly different estimates of elasticities, firm technical efficiencies and other quantities of economic interest.
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