Uncertainty, Production, Choice, and Agency: The State-Contingent Approach

by Robert G. Chambers , John Quiggin

• ISBN13: 9780521622448
• ISBN10: 0521622441
• Format: Hardcover
• Copyright: 2000-09-25
• Publisher: Cambridge University Press

Summary

This book demonstrates that the state-contingent approach provides the best way to think about all problems in the economics of uncertainty, including problems of consumer choice, the theory of the firm, and principal agent relationships. The authors demonstrate that dual methods apply under uncertainty and that the dual representations can be developed for stochastic technologies. Moreover, proper exploitation of the properties of alternative primal and dual representations of preferences allows analysts to generalize and extend the results of the existing literature on preferences under uncertainty, thus making expected-utility theory largely superfluous for many decisions.

Table of Contents

List of Symbols	xi
Acknowledgments	xv
Introduction	1	(4)
Overview of the Book	5	(12)
PART ONE: THEORY
States of Nature	17	(15)
States of Nature	17	(5)
The Parametrized Distribution Formulation	22	(3)
Probability Distributions Over Finite Sets of Outcomes	25	(4)
Choice Under Uncertainty	29	(3)
State-Contingent Production	32	(44)
The Stochastic Production Function	34	(2)
The Beginnings of a State-Contingent Technology	36	(5)
A State-Contingent Production Technology	41	(3)
Properties of the Output Set	44	(11)
Properties of Input Sets	55	(6)
A Functional Representation of the State-Contingent Technology: The State-Contingent Output-Distance Function	61	(4)
The Structure of State-Contingent Technologies	65	(9)
Appendix: Properties of the State-Contingent Output-Distance Function	74	(2)
Risk Aversion, Preferences, and Probability	76	(46)
Utility and the Form of the Objective Function	77	(3)
Examples of Preference Functions	80	(3)
Risk Attitudes	83	(21)
Increases in Risk	104	(11)
Schur-Concavity and Generalized Schur-Concavity	115	(7)
Indirect and Dual Representations of Stochastic Technologies	122	(42)
Defining the Effort-Cost Function	123	(2)
Linear Pricing and Effort Cost	125	(15)
Nonlinear Input Evaluation and Effort Cost	140	(3)
The Revenue-Cost Function	143	(2)
Measuring Technological Risk: The Certainty-Equivalent Revenue and the Production-Risk Premium	145	(9)
The Structure of Effort-Cost Functions	154	(6)
Appendix: Derivation of Properties of the Effort-Cost and Revenue-Cost Functions	160	(4)
The Theory of State-Contingent Production	164	(31)
Risk Neutrality	165	(11)
Maximin Preferences	176	(7)
Generalized Schur-Concave Preferences	183	(12)
PART TWO: APPLICATIONS
Production with Futures and Forward Markets	195	(40)
The Model	197	(1)
Nonstochastic Production	198	(5)
Optimal Behavior in the Absence of Futures Markets	203	(9)
Optimal Producer Behavior in the Presence of a Single Forward Market	212	(16)
A Separation Theorem with Stochastic Production	228	(4)
Optimal Producer Behavior in the Presence of Multiple-Futures Markets	232	(3)
Production Insurance	235	(37)
The State-Contingent Technology and Farmer Preferences	236	(2)
Farmer Behavior in the Absence of Insurance	238	(1)
Farmer Behavior in the Presence of Actuarially Fair Insurance with No Loading Factors	239	(7)
Farmer Behavior in the Presence of Convex Loading Factors	246	(14)
Nonstate-Contingent Insurance Contracts	260	(10)
Discussion	270	(2)
Production and Nonpoint-Source Pollution Regulation	272	(24)
The Model	274	(4)
The First Best	278	(3)
An Algorithm for the Hidden-Action Corn-Pollution Problem	281	(7)
The Optimal Incentive Scheme and Public Pricing	288	(5)
Risk-Substituting Pollution and the Optimal Return	293	(1)
Summary	294	(2)
The Moral-Hazard Problem	296	(39)
Historical Development	297	(3)
Chapter Overview	300	(2)
State-Contingent Technology and the Agency Problem	302	(9)
Two Agency-Cost Functions	311	(11)
The Second-Stage Problem	322	(8)
Extensions and Applications	330	(5)
Endogenous Reservation Utility: Agency and Exploitation	335	(22)
The Model	337	(5)
An Optimal Agrarian Contract for an ``Expected-Utility Taker''	342	(4)
The Profit-Maximizing Level of Peasant Exploitation	346	(5)
Exploitation, Agency, and Social Welfare	351	(5)
Extensions	356	(1)
Epilog	357	(2)
References and Selected Bibliography	359	(6)
Index	365