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Production Under Uncertainty: A Simulation Study

  • Sriram Shankar

    ()

    (School of Economics, University of Queensland)

  • Chris O'Donnell

    ()

    (School of Economics, University of Queensland)

  • John Quiggin

    ()

    (School of Economics, University of Queensland)

In this article we model production technology in a state-contingent framework. Our model analyzes production under uncertainty without being explicit about the nature of producer risk preferences. In our model producers’ risk preferences are captured by the risk-neutral probabilities they assign to the different states of nature. Using a state-general state-contingent specification of technology we show that rational producers who encounter the same stochastic technology can make significantly different production choices. Further, we develop an econometric methodology to estimate the risk-neutral probabilities and the parameters of stochastic technology when there are two states of nature and only one of which is observed. Finally, we simulate data based on our state-general state-contingent specification of technology. Biased estimates of the technology parameters are obtained when we apply conventional ordinary least squares (OLS) estimator on the simulated data.

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Paper provided by Risk and Sustainable Management Group, University of Queensland in its series Risk & Uncertainty Working Papers with number WPR10_3.

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Date of creation: Dec 2010
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Handle: RePEc:rsm:riskun:r10_3
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  1. Svend Rasmussen, 2003. "Criteria for optimal production under uncertainty. The state-contingent approach," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 47(4), pages 447-476, December.
  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. Powell, Alan A. & Gruen, Fred H.G., 1967. "The Estimation Of Production Frontiers: The Australian Livestock/Cereals Complex," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 11(01), June.
  4. 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.
  5. O'Donnell, Christopher J. & Shankar, Sriram, 2009. "Estimating State-Allocable Production Technologies When There are Two States of Nature and State Allocations of Inputs are Unobserved," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia 50898, Australian Agricultural and Resource Economics Society.
  6. Jean-Paul Chavas, 2008. "A Cost Approach to Economic Analysis Under State-Contingent Production Uncertainty," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(2), pages 435-466.
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