Centre for Efficiency and Productivity Analysis

Chambers and Quiggin (2000) advocate the use of state-contingent production technologies to represent risky production and establish important theoretical results concerning producer behaviour under uncertainty. Unfortunately, perceived problems in the estimation of state-contingent models have limited the usefulness of the approach in policy formulation. We show that fixed and random effects state-contingent production frontiers can be conveniently estimated in a finite mixtures framework. An empirical example is provided. Compared to standard estimation approaches, we find that estimating production frontiers in a state-contingent framework produces significantly different estimates of elasticities, firm technical efficiencies and other quantities of economic interest. 1 Paper presented at the 2004 Asia-Pacific Productivity Conference, Brisbane, 14-16 July. The authors thank the International Rice Research Institute (IRRI) for providing access to the data.