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

Author

Listed:
  • Robert G. Chambers

    (Dept of Agricultural and Resource Economics, University of Maryland, College Park)

  • John Quiggin

    (Department of Economics, University of Queensland)

Abstract

Separation results, as they are usually understood, refer to conditions under which a firm's production decisions are independent of its risk attitudes. Well-understood situations where separation occurs typically include those where technically feasible production opportunities are replicable in financial markets. This paper gives necessary and sufficient conditions for separation that go beyond these well-understood spanning conditions. To do so, we present 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 about the firm's technology and objective function.Our main analytical tool is the derivative-cost function, which gives the minimum cost of achieving a state-contingent return vector through a combination of production choices and trade in financial assets.

Suggested Citation

  • Robert G. Chambers & John Quiggin, 2003. "Separability of stochastic production decisions from producer risk preferences in the presence of financial markets," Risk & Uncertainty Working Papers WPR03_4, Risk and Sustainable Management Group, University of Queensland.
    • Handle: RePEc:rsm:riskun:r03_4
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    File URL: http://www.uq.edu.au/rsmg/WP/WPR03_4.pdf
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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. 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.
    3. 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.
    4. 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.
    5. Chambers, Robert G. & Quiggin, John, 2008. "Narrowing the no-arbitrage bounds," Journal of Mathematical Economics, Elsevier, vol. 44(1), pages 1-14, January.
    6. 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.
    7. 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.

    More about this item

    Keywords

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    JEL classification:

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

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