Uninsurable Risks: Uncertainty in Production, the Value of Information and Price Dispersion
AbstractThis article digresses over the interaction of uncertainty with the firm¡¯s optimal decisions in a simple framework: a standard price-taking (short-run restricted) single-input and output unit, subject to the interaction with a zeromean Bernoulli lottery of variable dispersion. The firm is always considered an expected profit-maximizing entity. We inspect the consequences of exogenous uncertainty on the optimal allocations and on its "mean-(and)variance" valuation position. On the one hand, we contrast the effect of different sources of uncertainty on the producer¡¯s problem¡ªinput and output prices and quantities. On the other, we analyse the impact of ex-post flexibility of the decision variables. Importance and role of measures of risk-aversion (of concavity and convexity) imbedded in the firms technology ¡ª either the production, marginal productivity or the cost function, ¡ª and potentially risk-enhancing or deterrent features of the latter in the transmission of exogenous uncertainty to the optimal profits¡¯ mean and volatility under the different scenarios are highlighted.
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Bibliographic InfoArticle provided by Society for AEF in its journal Annals of Economics and Finance.
Volume (Year): 8 (2007)
Issue (Month): 2 (November)
Uncertainty and Production; Uncertainty and Labor Demand; Firm¡¯s Valuation; Mean-Variance; Commitment under Uncertainty; Risk-aversion; Absolute Convexity; The Value of Information / Flexibility to a Firm; Statistical Discrimination;
Other versions of this item:
- Ana Paula Martins, 2008. "Uninsurable Risks: Uncertainty in Production, the Value of Information and Price Dispersion," Economics Bulletin, AccessEcon, vol. 28(8), pages A0.
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
- J71 - Labor and Demographic Economics - - Labor Discrimination - - - Hiring and Firing
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
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