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Certainty Equivalence and Bias in the Management of Production

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  • Tisdell, Clement A.

Abstract

The study uses Theil's concept of certainty equivalence and bias to analyse the production decisions of the purely competitive firm when some of its inputs are controlled and others are non-controlled and subject to random influences. Conditions are outlined under which a surrogate procedure based upon the expected values of the non-controlled variables leads to certainty equivalence and others under which it leads to bias in the controlled variables. General factors which determine the direction of the bias are discussed. The managerial optimality of the surrogate procedure is investigated and also its welfare implications. The analysis is of particular relevance to agriculture because of the prevalence there of random noncontrolled inputs in production.

Suggested Citation

  • Tisdell, Clement A., 1973. "Certainty Equivalence and Bias in the Management of Production," Review of Marketing and Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 41(04), pages 1-13, December.
    • Handle: RePEc:ags:remaae:9645
    DOI: 10.22004/ag.econ.9645
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    References listed on IDEAS

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    1. Dillon, John L., 1971. "An Expository Review of Bernoullian Decision Theory in Agriculture: Is Utility Futility?," Review of Marketing and Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 39(01), pages 1-78, March.
    2. I.D. McArthur & John L. Dillon, 1971. "Risk, Utility And Stocking Rate," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 15(1), pages 20-35, April.
    3. McArthur, I.D. & Dillon, John L., 1971. "Risk, Utility And Stocking Rate," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 15(1), pages 1-16, April.
    4. Emilio M. Francisco & Jock R. Anderson, 1972. "Chance And Choice West Of The Darling," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 16(2), pages 82-93, August.
    5. R.R. Officer & A.N. Halter & John L. Dillon, 1967. "Risk, Utility And The Palatabilty Of Extension Advice To Farmer Groups," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 11(2), pages 171-183, December.
    6. Richard R. Nelson, 1961. "Uncertainty, Prediction, and Competitive Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 75(1), pages 41-62.
    7. Malinvaud, E, 1969. "First Order Certainty Equivalence," Econometrica, Econometric Society, vol. 37(4), pages 706-718, October.
    8. Tisdell, Clem, 1970. "Implications of Learning for Economic Planning," Economic Change and Restructuring, Springer, vol. 10(3), pages 177-192.
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