Scale and Productivity Measurement under Risk

Abstract

The literature on risk and uncertainty gives an important place to studies comparing behavioral and comparative static results obtained under certainty and uncertainty. The standard neoclassical theory of the firm, however, has much more to offer than behavioral results. For example, the optimizing behavior of the profit-seeking firm insures that the degree of the firm's returns to scale can be measured by the ratio of cost to revenue. Furthermore, it is also possible to isolate measures of the rate of technical change for a profit-maximizing firm which depend solely upon observed prices and quantities. This note demonstrates some of the implications of uncertainty for measuring scale economies and the rate of technical change. Specifically, using a model developed by Agnar Sandmo (1971), it is demonstrated that under conditions of risk and uncertainty, there are generally no measures of the scale elasticity or the rate of technical change which can be derived from observations on prices and quantity without information on either the structure of production or the utility function which underlies Sandmo's analy-

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