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In this paper we develop a theoretical model that links dynamic efficiency measurement and optimal investment under uncertainty. It is widely acknowledged that uncertainty has an impact on the optimal factor use of a profit maximizing firm. This is particularly true for the optimal adjustment of the firm’s capital stock. While uncertainty has been considered in the static efficiency measurement literature it has been ignored so far in the context of dynamic efficiency measurement. This paper targets at closing this gap. For that purpose we take up a dynamic efficiency model which embeds a stochastic intertemporal duality model into a shadow cost framework and allows for measuring technical and allocative inefficiency. We derive hypotheses on how uncertainty affects the measurement of efficiency. The factor demand equations, which we derive, may serve as a starting point for an empirical validation of these hypotheses.

Keywords: efficiency ; shadow cost approach ; dynamic duality ; uncertainty

Subject(s): Agribusiness

Agricultural and Food Policy

Agricultural Finance

Crop Production/Industries

Demand and Price Analysis

Farm Management

Issue Date: 2011-06

Publication Type: Working or Discussion Paper

PURL Identifier: http://purl.umn.edu/129062

Total Pages: 35

JEL Codes: D61; D81; Q12

Series Statement: SiAg-Working Paper

10

Record appears in: Humboldt University of Berlin > Department of Agricultural Economics > Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers





Author: Huettel, Silke ; Narayana, Rashmi ; Odening, Martin

Source: http://ageconsearch.umn.edu/record/129062?ln=en



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