Firm Behaviour Under Uncertainty: A Simple Parametric Model

11 Pages Posted: 24 Jan 2013

See all articles by Sriram Shankar

Sriram Shankar

Australian National University (ANU) - ANU Centre for Social Research and Methods

Date Written: January 2013

Abstract

In this paper, we model production technology in a state‐contingent framework. We assume that all the firms use the same stochastic technology, but they may have different risk attitudes and information sets, and ex post they may operate in different production environments. Firms maximise ex ante their preference function subject to a stochastic technology constraint; in other words, they are assumed to act rationally, thereby leaving no room for either technical or allocative inefficiency. We provide a simple parametric functional form to represent the state‐contingent technology. Using simple numerical examples, we illustrate how optimal input–output choices are dramatically affected when firms have different preferences and information sets. Thus, we show that the observed disparateness of production choices among different firms can actually be attributed to the stochastic nature of the decision environment.

Keywords: risk‐averse, risk‐neutral, state‐contingent, uncertainty

Suggested Citation

Shankar, Sriram, Firm Behaviour Under Uncertainty: A Simple Parametric Model (January 2013). Australian Journal of Agricultural and Resource Economics, Vol. 57, Issue 1, pp. 141-151, 2013, Available at SSRN: https://ssrn.com/abstract=2206087 or http://dx.doi.org/10.1111/j.1467-8489.2012.00592.x

Sriram Shankar (Contact Author)

Australian National University (ANU) - ANU Centre for Social Research and Methods ( email )

Beryl Rawson Building (13)
Canberra, ACT 0200
Australia

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