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The Forward‐Looking Competitive Firm under Uncertainty
Author(s) -
Lence Sergio H.,
Hayes Dermot J.
Publication year - 1998
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.2307/1244503
Subject(s) - production (economics) , risk aversion (psychology) , economics , monotonic function , microeconomics , risk neutral , distribution (mathematics) , work (physics) , econometrics , financial economics , expected utility hypothesis , mathematics , mechanical engineering , mathematical analysis , engineering
Under realistic circumstances, forward‐looking risk‐averse firms will produce more than risk‐neutral firms, and a mean‐preserving spread of the price distribution will increase risk‐averse firms' production. These results depend on firms realizing that prices of inputs required for production in subsequent periods are contemporaneously correlated with output prices. This study rationalizes previously unexplained real‐world behavior such as the spreading of sales over time and short‐run production (or storage) at an expected loss. The present findings imply that empirical work should not assume, nor should it find, a monotonic relationship between output and the level of risk or of risk aversion.