Estimation of Australian Wool and Lamb Production Technologies under Uncertainty: An Error-Components Approach

A model of producer behavior, which explicitly accounts for both output price and production uncertainty, is formulated and estimated. If the production technology is multiplicatively separable in its deterministic and stochastic components, then the expected utility maximization problem implies cost minimization for planned or expected output. Consequently, our empirical model of three lamb- and wool-producing sectors in Australia involves the estimation of a system of input cost share and cost equations whose disturbances have an error-components structure. The empirical results are evaluated in terms of input demand elasticities, and estimates of the stochastic components of production are presented.