Criteria for optimal production under uncertainty. The state-contingent approach

The state-contingent approach to production economics presented by Chambers and Quiggin provides a new basis for deriving optimality criteria for production under uncertainty. In the present paper criteria are formally derived for risk-averse producers. It is not possible to derive useful criteria for strictly risk-averse producers, but useful criteria for risk-neutral producers are presented for three different types of input. Based on a formal definition of ‘good’ and ‘bad’ states of nature, the use of inputs and levels of production of strictly risk-averse producers are compared to those of risk-neutral producers. Depending on the type of input, risk-averse producers may use more or less input than risk-neutral producers.