The Firm under Uncertainty with General Risk-Averse Preferences: A State-Contingent Approach

This paper summarizes and synthesizes recent developments in the state-contingent theory of production under uncertainty presented by Chambers and Quiggin (2000) with a particular focus on the case of generalized expected utility preferences. The problem of the risk-averse firm under price and production uncertainty is analyzed using a state-contingent production technology and general risk-averse preferences. The concept of an efficient frontier, which identifies all potentially optimal production plans for weakly risk-averse decisionmakers, is introduced and used to develop comparative static results. For constant absolute risky technologies, the efficient frontier is shown to correspond to a unique isocost contour.