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A Minimax Regret Approach to Decision Making Under Uncertainty
Author(s) -
Mishra Ashok K.,
Tsionas Mike G.
Publication year - 2020
Publication title -
journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.157
H-Index - 61
eISSN - 1477-9552
pISSN - 0021-857X
DOI - 10.1111/1477-9552.12370
Subject(s) - regret , minimax , econometrics , bayesian probability , computer science , mathematical optimization , set (abstract data type) , markov chain monte carlo , markov decision process , markov chain , economics , mathematical economics , mathematics , markov process , statistics , artificial intelligence , machine learning , programming language
Abstract We propose a minimax regret approach to optimal factor demand under uncertainty. Regret is the deviation of any given decision from the optimal decision based on a specified set of possible scenarios for the uncertain variables. This approach does not require the specification of instrumental variables to control for unobserved states of nature, and also does not require specification of the number of possible states in advance. Importantly, ex post production shocks can be estimated using our approach, and full statistical inferences can be obtained. Econometric techniques are based on Bayesian analysis using Markov Chain Monte Carlo techniques. A substantive empirical application is provided to illustrate the new approach.