The state-contingent approach to production and choice under uncertainty: usefulness as a basis for economic modeling

Abstract

The state-contingent approach developed by Chambers and Quiggin (2000) constitutes an attractive blend of a theory of production analysis under uncertainty and a theory of decision-making under uncertainty.

One of the goals of this contribution is to introduce the reader to the approach by outlining its contents while comparing and contrasting it to related theories. With respect to production analysis: an emphasis is made on the ability of the approach to deliver well defined cost functions corresponding to stochastic production technologies. With respect to decision-making under uncertainty: the comparison with other theories consistent with a rational agent emphasizes the production theoretical basis of the state-contingent approach.

It is the author’s belief that appropriately categorizing the state-contingent approach serves the primary goal of this work: to explore its usefulness as a basis for economic modeling. Some challenges regarding an empirical implementation are discussed: challenges in estimating the parameters of a state-contingent technology representation in general, as well as challenges arising from the fact that the approach is constructed around the argument pioneered by Leonard J Savage: that probabilities underlying economic decision-making are inherently subjective.

(The financial support of ScienceCampus Halle is gratefully acknowledged.)