Estimating state-contingent production frontiers

Chambers and Quiggin (2000) use state-contingent representations of risky production technologies to establish important theoretical results concerning producer behavior 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 conventional 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.

The state-contingent approach to production under uncertainty

The central claim of this paper is that the state-contingent approach provides the best way to think about all problems in the economics of uncertainty, including problems of consumer choice, the theory of the firm, and principal-agent relationships. This claim is illustrated by recent developments in, and applications of, the state-contingent approach.

Estimating State-contingent Production Frontiers

Chambers and Quiggin (2000) use state-contingent representations of risky production technologies to establish important theoretical results concerning producer behavior 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 conventional estimation approaches, we find that estimating production frontiers in a statecontingent framework produces significantly different estimates of elasticities, firm technical efficiencies and other quantities of economic interest.

Water rights for variable supplies

The relative merits of different systems of property rights to allocate water among different extractive uses are evaluated for the case where variability of supply is important. Three systems of property rights are considered. In the first, variable supply is dealt with through the use of water entitlements defined as shares of the total quantity available. In the second, there are two types of water entitlements, one for water with a high security of supply and the other a lower security right for the residual supply. The third is a system of entitlements specified as state-contingent claims. With zero transaction costs, all systems are efficient. In the realistic situation where transaction costs matter, the system based on state-contingent claims is globally optimal, and the system with high-security and lower security entitlements is preferable to the system with share entitlements.

Fixed wages and bonuses in agency contracts: the case of a continuous state space

In this paper, we extend the state-contingent production approach to principal–agent problems to the case where the state space is an atomless continuum. The approach is modelled on the treatment of optimal tax problems. The central observation is that, under reasonable conditions, the optimal contract may involve a fixed wage with a bonus for above-normal performance. This is analogous to the phenomenon of "bunching" at the bottom in the optimal tax literature.

Price stabilization and the risk-averse firm

An analytically simple and tractable approach to firm-level welfare analysis of complete and partial mean-preserving price stabilization for producers with general risk-averse preferences facing a stochastic technology is developed. Necessary and sufficient conditions for price stabilization to be welfare enhancing are derived under different assumptions of the producer's preferences and the producer's technology. Existing stabilization results for the risk-averse firm are shown to be corollaries of these more general results.

Drought policy: a graphical analysis

The standard approach to modelling production under uncertainty has relied on the concept of the stochastic production function. In the present paper, it is argued that a state-contingent production model is more flexible and realistic. The model is applied to the problem of drought policy.

Invariant risk attitudes

Concepts of constant absolute risk aversion and constant relative risk aversion have proved useful in the analysis of choice under uncertainty, but are quite restrictive, particularly when they are imposed jointly. A generalization of constant risk aversion, referred to as invariant risk aversion is developed. Invariant risk aversion is closely related to the possibility of representing preferences over state-contingent income vectors in terms of two parameters, the mean and a linearly homogeneous, translation-invariant index of riskiness. The best-known index with such properties is the standard deviation. The properties of the capital asset pricing model, usually expressed in terms of the mean and standard deviation, may be extended to the case of general invariant preferences. (C) 2003 Elsevier Inc. All rights reserved.

Judicial (in)activism in Australia's secular commonwealth

his article addresses two aspects of Australia's soft secular government. The first aspect explains how, and asks why, judges have been inactive in helping to draw the contours of secular government in Australia. The principal reason is that much of the social regulation that provokes the interest of faith-based groups is the constitutional concern of the States, and no State Constitution claims to coordinate relations between church and state. Moreover, the electorate has twice refused to pass referenda, in 1944 and 1988, for extending a constitutional demand of secular governance to the States. However, this is not so for the Commonwealth. It falls under the restrictions of section 116 of the federal Constitution, which states: The Commonwealth shall not make any law for establishing any religion ('the establishment clause') or for imposing any religious observance, or for prohibiting the free exercise of any religion ('the free exercise clause'), and no religious test shall be required as a qualification for any office or public trust under the Commonwealth. As will be explained, while methods of legal interpretation suggest that section 116's establishment clause could place mild demands of non-discrimination on the federal Parliament, judicial inactivity in policing such demands on the Commonwealth, paradoxically, has arguably been secured by judicial activism in the High Court. A second aspect of secular government addressed is the High Court's disposal of 'the separation of church and state' as a constitutional principle in Australia. The contrast, of course, is to the United States, where for sixty years 'separation' has been given uneven recognition as a rule of constitutional law, and has undoubtedly driven the development of hard forms of secular governance in that country. The centrepiece of American secular government is the 1971 decision in Lemon v Kurtzman, where the US Supreme Court held that valid legislation had to pass three tests, ie: First, the statute must have a secular legislative purpose; second, its principal or primary effect must be one that neither advances nor inhibits religion .. . finally, the statute must not foster 'an excessive government entanglement with religion. The third 'entanglement' prong of Lemon is the modern, less ambitious, form of the 'wall of separation', prohibiting too close an engagement between church and state. As this paper will demonstrate, 'entanglement's' destiny shows how unlikely it is that 'separation' can survive as a meaningful constitutional principle in the USA. And, it will also be argued that 'separation' has even poorer prospects for import to Australia.

Incentives and standards in agency contracts

This paper studies the structure of state-contingent contracts in the presence of moral hazard and multitasking. Necessary and sufficient conditions for the presence of multitasking to lead to fixed payments instead of incentive schemes are identified. It is shown that the primary determinant of whether multitasking leads to higher or lower powered incentives is the role that noncontractible outputs play in helping the agent deal with the production risk associated with the observable and contractible outputs. When the noncontractible outputs are risk substitutes and are socially undesirable, standards are never optimal. If the noncontractible outputs are socially desirable, standards are never optimal if the noncontractible outputs play a risk-complementary role.

Contingent on context? Social work and the state in Australia, Britain, and the USA

The notion that social work is an international profession, operating with generally similar goals, methodologies, and common values is considered critically. Examining the political and social contexts of three countries with liberal democratic governments-Australia, Britain and the United States-the role of social work within the welfare processes of each country is compared. While social work as an identifiable professional activity shares some features, it is argued that the idea of its having a core essence needs to be tempered with a realistic assessment of the importance of contextually created difference. Recent and rapid developments in the institutional context, such as those experienced in these three countries, further underscore the limited utility of the notion of a common professional project.