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Production Under Uncertainty: A Simulation Study

Sriram Shankar (), Christopher O'Donnell and John Quiggin ()

No WPR10_3, Risk & Uncertainty Working Papers from Risk and Sustainable Management Group, University of Queensland

Abstract: 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.

Keywords: CES; Cobb-Douglas; OLS; output-cubical; risk-neutral; state-allocable; state-contingent (search for similar items in EconPapers)
JEL-codes: C15 C63 D21 D22 D81 Q10 (search for similar items in EconPapers)
Date: 2010-12
New Economics Papers: this item is included in nep-agr, nep-ecm, nep-eff, nep-ore and nep-upt
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http://www.uq.edu.au/rsmg/WP/WPR10_03.pdf (application/pdf)

Related works:
Journal Article: Production under uncertainty: a simulation study (2013) Downloads
Working Paper: Production Under Uncertainty: A Simulation Study (2010) Downloads
Working Paper: Production Under Uncertainty: A Simulation Study (2010) Downloads
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