Uncertainty, Production, Choice, and Agency: The State-Contingent Approach / Edition 1

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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.
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Editorial Reviews

From the Publisher
'… tremendous scope of achievement in this signal contribution to the literature … I would be remiss in doing other than recommend that Journal readers join me in treasuring this book in their library.' The Australian Journal of Agricultural and Resource Economics
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Product Details

  • ISBN-13: 9780521622448
  • Publisher: Cambridge University Press
  • Publication date: 9/25/2000
  • Edition number: 1
  • Pages: 384
  • Product dimensions: 6.97 (w) x 9.96 (h) x 1.06 (d)

Table of Contents

List of Symbols
Introduction 1
Overview of the Book 5
1 States of Nature 17
1.1 States of Nature 17
1.2 The Parametrized Distribution Formulation 22
1.3 Probability Distributions Over Finite Sets of Outcomes 25
1.4 Choice Under Uncertainty 29
2 State-Contingent Production 32
2.1 The Stochastic Production Function 34
2.2 The Beginnings of a State-Contingent Technology 36
2.3 A State-Contingent Production Technology 41
2.4 Properties of the Output Set 44
2.5 Properties of Input Sets 55
2.6 A Functional Representation of the State-Contingent Technology: The State-Contingent Output-Distance Function 61
2.7 The Structure of State-Contingent Technologies 65
2.8 Appendix: Properties of the State-Contingent Output-Distance Function 74
3 Risk Aversion, Preferences, and Probability 76
3.1 Utility and the Form of the Objective Function 77
3.2 Examples of Preference Functions 80
3.3 Risk Attitudes 83
3.4 Increases in Risk 104
3.5 Schur-Concavity and Generalized Schur-Concavity 115
4 Indirect and Dual Representations of Stochastic Technologies 122
4.1 Defining the Effort-Cost Function 123
4.2 Linear Pricing and Effort Cost 125
4.3 Nonlinear Input Evaluation and Effort Cost 140
4.4 The Revenue-Cost Function 143
4.5 Measuring Technological Risk: The Certainty-Equivalent Revenue and the Production-Risk Premium 145
4.6 The Structure of Effort-Cost Functions 154
4.7 Appendix: Derivation of Properties of the Effort-Cost and Revenue-Cost Functions 160
5 The Theory of State-Contingent Production 164
5.1 Risk Neutrality 165
5.2 Maximin Preferences 176
5.3 Generalized Schur-Concave Preferences 183
6 Production with Futures and Forward Markets 195
6.1 The Model 197
6.2 Nonstochastic Production 198
6.3 Optimal Behavior in the Absence of Futures Markets 203
6.4 Optimal Producer Behavior in the Presence of a Single Forward Market 212
6.5 A Separation Theorem with Stochastic Production 228
6.6 Optimal Producer Behavior in the Presence of Multiple-Futures Markets 232
7 Production Insurance 235
7.1 The State-Contingent Technology and Farmer Preferences 236
7.2 Farmer Behavior in the Absence of Insurance 238
7.3 Farmer Behavior in the Presence of Actuarially Fair Insurance with No Loading Factors 239
7.4 Farmer Behavior in the Presence of Convex Loading Factors 246
7.5 Nonstate-Contingent Insurance Contracts 260
8 Production and Nonpoint-Source Pollution Regulation 272
8.1 The Model 274
8.2 The First Best 278
8.3 An Algorithm for the Hidden-Action Corn-Pollution Problem 281
8.4 The Optimal Incentive Scheme and Public Pricing 288
8.5 Risk-Substituting Pollution and the Optimal Return 293
9 The Moral-Hazard Problem 296
9.1 Historical Development 297
9.2 Chapter Overview 300
9.3 State-Contingent Technology and the Agency Problem 302
9.4 Two Agency-Cost Functions 311
9.5 The Second-Stage Problem 322
9.6 Extensions and Applications 330
10 Endogenous Reservation Utility: Agency and Exploitation 335
10.1 The Model 337
10.2 An Optimal Agrarian Contract for an "Expected-Utility Taker" 342
10.3 The Profit-Maximizing Level of Peasant Exploitation 346
10.4 Exploitation, Agency, and Social Welfare 351
10.5 Extensions 356
Epilog 357
References and Selected Bibliography 359
Index 365
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