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Separation and Hedging Results with State‐Contingent Production

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  • Robert G. James
  • John Quiggan

Abstract

A state‐contingent model of production under uncertainty is developed and compared with more traditional models of production under uncertainty. Producer behaviour with both production and price risk, in the presence and in the absence of futures and forward markets, is analysed in this state‐contingent framework. Conditions for the optimal hedge to be positive or negative are derived. We also show that, under plausible conditions, a risk‐averse producer facing price uncertainty and the ability to hedge price risk will never willingly adopt a non‐stochastic technology. New separation results, which hold in the presence of both price and production risk, are then developed. These separation results generalize Townsend’s spanning results by reducing the number of necessary forward markets by one.

Suggested Citation

  • Robert G. James & John Quiggan, 1997. "Separation and Hedging Results with State‐Contingent Production," Economica, London School of Economics and Political Science, vol. 64(254), pages 187-209, May.
    • Handle: RePEc:bla:econom:v:64:y:1997:i:254:p:187-209
    DOI: 10.1111/1468-0335.00073
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    Cited by:

    1. Jaenicke, Edward C. & Larson, James A., 2001. "Production Risk Revisited In A Stochastic Frontier Framework: Evaluating Noise And Inefficiency In Cover Crop Systems," 2001 Annual meeting, August 5-8, Chicago, IL 20477, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Chambers, Robert G., 2006. "Some Empirical Implications of State-Contingent Production Models," 2006 Conference (50th), February 8-10, 2006, Sydney, Australia 137789, Australian Agricultural and Resource Economics Society.
    3. C. J. O'Donnell & W. E. Griffiths, 2006. "Estimating State-Contingent Production Frontiers," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(1), pages 249-266.
    4. David A. Hennessy & Jutta Roosen, 2003. "A Cost‐Based Model of Seasonal Production with Application to Milk Policy," Journal of Agricultural Economics, Wiley Blackwell, vol. 54(2), pages 285-312, July.
    5. John Quiggin & Robert G. Chambers, 2006. "The state-contingent approach to production under uncertainty ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(2), pages 153-169, June.
    6. Hurley, Terrance M., 2016. "Slutsky, Let Me Introduce You to Arrow-Pratt: Competitive Price Effects with Uncertain Production," Staff Papers 250204, University of Minnesota, Department of Applied Economics.
    7. Quiggin, John & Chambers, Robert G., 2005. "The state-contingent approach to production and uncertainty," Risk and Sustainable Management Group Working Papers 151168, University of Queensland, School of Economics.
    8. Wong, Kit Pong, 2006. "The effects of abandonment options on operating leverage and forward hedging," International Review of Economics & Finance, Elsevier, vol. 15(1), pages 72-86.

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