Rethinking Production Under Uncertainty
70 Pages Posted: 16 Dec 2019 Last revised: 6 Apr 2020
Date Written: November 25, 2019
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
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