Efficiency Analysis Under Uncertainty: A Simulation Study

18 Pages Posted: 8 Apr 2015

See all articles by Sriram Shankar

Sriram Shankar

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

Date Written: April 2015

Abstract

We model production technology in a state‐contingent framework assuming that the firms maximise ex ante their preference function subject to stochastic technology constraint; in other words, firms are assumed to act rationally. We show that rational producers who face the same stochastic technology can make significantly different production choices. Further, we develop an econometric methodology to estimate the risk‐neutral probabilities, efficiency scores and the parameters of stochastic technology when there are two states of nature and only one of which is observed. Finally, we simulate noiseless data based on our state‐contingent specification of technology. Our state‐contingent estimator recovers technology parameters and other economic quantities of interest without any error. But, when we apply conventional efficiency estimators to the simulated data, we obtain biased estimates of technical efficiency.

Keywords: data envelopment analysis, risk‐neutral, state‐contingent, stochastic frontier analysis

Suggested Citation

Shankar, Sriram, Efficiency Analysis Under Uncertainty: A Simulation Study (April 2015). Australian Journal of Agricultural and Resource Economics, Vol. 59, Issue 2, pp. 171-188, 2015, Available at SSRN: https://ssrn.com/abstract=2591673 or http://dx.doi.org/10.1111/1467-8489.12055

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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