Rethinking Production Under Uncertainty

70 Pages Posted: 16 Dec 2019 Last revised: 6 Apr 2020

See all articles by John H. Cochrane

John H. Cochrane

Hoover Institution; National Bureau of Economic Research (NBER); University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: November 25, 2019

Abstract

Conventional models of production under uncertainty specify that output is produced in fixed proportions across states of nature. I investigate a representation of technology that allows firms to transform output from one state to another. I allow the firm to choose the distribution of its random productivity from a convex set of such distributions, described by a limit on a moment of productivity scaled by a natural productivity shock. The model produces a simple discount factor linked to productivity, which can be used to price a wide variety of assets, without regard to preferences.

Keywords: production-based asset pricing

JEL Classification: G12

Suggested Citation

Cochrane, John H., Rethinking Production Under Uncertainty (November 25, 2019). Available at SSRN: https://ssrn.com/abstract=3494692 or http://dx.doi.org/10.2139/ssrn.3494692

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