Efficiency analysis in the presence of uncertainty

Chris OÕDonnell, Robert Chambers () and John Quiggin
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Chris OÕDonnell: University of Queensland
Authors registered in the RePEc Author Service: Christopher John O'Donnell

No WP2R06, Risk & Uncertainty Working Papers from Risk and Sustainable Management Group, University of Queensland

Abstract: In a stochastic decision environment, differences in information can lead rational decision makers facing the same stochastic technology and the same markets to make different production choices. Efficiency and productivity measurement in such a setting can be seriously and systematically biased by the manner in which the stochastic technology is represented. For example, conventional production frontiers implicitly impose the restriction that information differences have no effect on the way risk-neutral decision makers utilize the same input bundle. The result is that rational and efficient ex ante production choices can be mistakenly characterized as inefficient -- informational differences are mistaken for differences in technical efficiency. This paper uses simulation methods to illustrate the type and magnitude of empirical errors that can emerge in efficiency analysis as a result of overly restrictive representations of production technologies.

JEL-codes: D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr, nep-eff and nep-ict
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Efficiency analysis in the presence of uncertainty (2010)
Working Paper: Efficiency analysis in the presence of uncertainty (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:rsm:riskun:r06_2

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