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Estimating State-Contingent Production Frontiers

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  • C. J. O'Donnell
  • W. E. Griffiths

Abstract

Chambers and Quiggin (2000) use state-contingent representations of risky production technologies to establish important theoretical results concerning producer behavior under uncertainty. Unfortunately, perceived problems in the estimation of state-contingent models have limited the usefulness of the approach in policy formulation. We show that fixed and random effects state-contingent production frontiers can be conveniently estimated in a finite mixtures framework. An empirical example is provided. Compared to conventional estimation approaches, we find that estimating production frontiers in a state-contingent framework produces significantly different estimates of elasticities, firm technical efficiencies, and other quantities of economic interest. Copyright 2006, Oxford University Press.

Suggested Citation

  • 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.
    • Handle: RePEc:oup:ajagec:v:88:y:2006:i:1:p:249-266
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    File URL: http://hdl.handle.net/10.1111/j.1467-8276.2006.00851.x
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    References listed on IDEAS

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    1. Chambers, R.G. & Quiggin, J., 1995. "Separation and Hedging Results with State-Contingent Production," Papers 293, Australian National University - Department of Economics.
    2. Robert G. Chambers & John Quiggin, 2002. "The State-Contingent Properties of Stochastic Production Functions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(2), pages 513-526.
    3. Chambers, Robert G. & Quiggin, John C., 2004. "Technological and financial approaches to risk management in agriculture: an integrate approach," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 48(2), pages 1-25.
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    5. Chambers,Robert G. & Quiggin,John, 2000. "Uncertainty, Production, Choice, and Agency," Cambridge Books, Cambridge University Press, number 9780521785235, September.
    6. Koop, Gary & Steel, Mark F.J. & Osiewalski, Jacek, 1992. "Posterior analysis of stochastic frontier models using Gibbs sampling," DES - Working Papers. Statistics and Econometrics. WS 3677, Universidad Carlos III de Madrid. Departamento de Estadística.
    7. Schmidt, Peter & Sickles, Robin C, 1984. "Production Frontiers and Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 2(4), pages 367-374, October.
    8. Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, vol. 99(398), pages 1065-1082, December.
    9. 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.
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    11. Rasmussen, Svend, 2004. "Optimizing Production under Uncertainty: Generalisation of the State-Contingent Approach and Comparison of Methods for Empirical Application," Unit of Economics Working Papers 24184, Royal Veterinary and Agricultural University, Food and Resource Economic Institute.
    12. Kumbhakar, Subal C., 1990. "Production frontiers, panel data, and time-varying technical inefficiency," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 201-211.
    13. Battese, George E. & Coelli, Tim J., 1988. "Prediction of firm-level technical efficiencies with a generalized frontier production function and panel data," Journal of Econometrics, Elsevier, vol. 38(3), pages 387-399, July.
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