Efficiency analysis in the presence of uncertainty

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.


Issue Date:
May 26 2006
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/151176
Total Pages:
35
JEL Codes:
C21; D21; D24; D81
Series Statement:
Risk and Uncertainty Program
R06/2




 Record created 2017-04-01, last modified 2017-08-27

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