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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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    References listed on IDEAS

    as
    1. Rahi Rohit, 1995. "Optimal Incomplete Markets with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 65(1), pages 171-197, February.
    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. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
    4. TallariniJr., Thomas D., 2000. "Risk-sensitive real business cycles," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 507-532, June.
    5. Chambers,Robert G. & Quiggin,John, 2000. "Uncertainty, Production, Choice, and Agency," Cambridge Books, Cambridge University Press, number 9780521785235.
    6. Clark, Stephen A., 1993. "The valuation problem in arbitrage price theory," Journal of Mathematical Economics, Elsevier, vol. 22(5), pages 463-478.
    7. Anderson, Ronald W & Danthine, Jean-Pierre, 1981. "Cross Hedging," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1182-1196, December.
    8. Robert G. Chambers & John Quiggin, 1998. "Cost Functions and Duality for Stochastic Technologies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(2), pages 288-295.
    9. Holthausen, Duncan M, 1979. "Hedging and the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 69(5), pages 989-995, December.
    10. Danthine, Jean-Pierre, 1978. "Information, futures prices, and stabilizing speculation," Journal of Economic Theory, Elsevier, vol. 17(1), pages 79-98, February.
    11. LeRoy,Stephen F. & Werner,Jan, 2014. "Principles of Financial Economics," Cambridge Books, Cambridge University Press, number 9781107024120, February.
    12. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
    13. Sanford J. Grossman & Joseph E. Stiglitz, 1980. "Stockholder Unanimity in Making Production and Financial Decisions," The Quarterly Journal of Economics, Oxford University Press, vol. 94(3), pages 543-566.
    14. Ross, Stephen A, 1987. "Arbitrage and Martingales with Taxation," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 371-393, April.
    15. repec:arz:wpaper:eres1993-121 is not listed on IDEAS
    16. Anderson, Ronald W & Danthine, Jean-Pierre, 1983. "Hedger Diversity in Futures Markets," Economic Journal, Royal Economic Society, vol. 93(37), pages 370-389, June.
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    Citations

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    Cited by:

    1. Chambers, Robert G. & Quiggin, John, 2008. "Narrowing the no-arbitrage bounds," Journal of Mathematical Economics, Elsevier, vol. 44(1), pages 1-14, January.
    2. 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.
    3. 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

    state-contingent production;

    JEL classification:

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

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