Optimizing production under uncertainty: generalization of the state-contingent approach and comparison with the EV model

This Working Paper derives criteria for optimal production under uncertainty based on the state-contingent approach (Chambers and Quiggin, 2000), and discusses po-tential problems involved in applying the state-contingent approach in a normative context. The analytical approach uses the concept of state-contingent production functions and a definition of inputs including both sort of input, activity and alloca-tion technology. It also analyses production decisions where production is combined with trading in state-contingent claims such as insurance contracts. The final part discusses the relative benefits and of using the state-contingent approach in a norma-tive context, compared to the EV model.