Criteria for optimal production under uncertainty. The state‐contingent approach

The state‐contingent approach to production economics presented by Chambers and Quiggin provides a new basis for deriving optimality criteria for production under uncertainty. In the present paper criteria are formally derived for risk‐averse producers. It is not possible to derive useful criteria for strictly risk‐averse producers, but useful criteria for risk‐neutral producers are presented for three different types of input. Based on a formal definition of ‘good’ and ‘bad’ states of nature, the use of inputs and levels of production of strictly risk‐averse producers are compared to those of risk‐neutral producers. Depending on the type of input, risk‐averse producers may use more or less input than risk‐neutral producers.