Firm behaviour under uncertainty: a simple parametric model

• Published in: The Australian journal of agricultural and resource economics Vol. 57; no. 1; pp. 141 - 151
• Main Author: Shankar, Sriram
• Format: Journal Article
• Language: English
• Published: Oxford, UK Blackwell Publishing Ltd 01.01.2013; Blackwell Publ. Asia
• Subjects: Agricultural economics; Companies; Decision theory; Econometrics; Industrial technology; Information technology; Input output analysis; Organizational behavior; Organizational behaviour; Productivity; Risk; Risk-averse; Risk-neutral; State-contingent; Stochastic models; Stochastic processes; Studies; Uncertainty; Australia
• ISSN: 1364-985X; 1467-8489; 1467-8489
• DOI: 10.1111/j.1467-8489.2012.00592.x

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.