A Producer Theory with Business Risks
AbstractIn this paper, we consider a producer who faces uninsurable business risks due to incomplete spanning of asset markets over stochastic goods market outcomes, and examine how the presence of the uninsurable business risks affects the producerÃ¢â‚¬â„¢s optimal pricing and production behaviours. Three key (inter-related) results we find are: (1) optimal prices in goods markets comprise Ã¢â‚¬ËœmarkupÃ¢â‚¬â„¢ to the extent of market power and Ã¢â‚¬ËœpremiumÃ¢â‚¬â„¢ by shadow price of the risks; (2) price inertia as we observe in data can be explained by a joint work of risk neutralization motive and marginal cost equalization condition; (3) the relative responsiveness of risk neutralization motive and marginal cost equalization at optimum is central to the cyclical variation of markups, providing a consistent explanation for procyclical and countercyclical movements. By these results, the proposed theory of producer leaves important implications both micro and macro, and both empirical and theoretical.
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Bibliographic InfoPaper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201201.
Date of creation: 15 Jan 2012
Date of revision:
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Uninsurable Business Risks; Markup; Risk Premium; Hedge and Offer; Price Inertia; Stochastic Dominance; Conditional Sales Ratio.;
Other versions of this item:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-AGR-2012-07-01 (Agricultural Economics)
- NEP-ALL-2012-07-01 (All new papers)
- NEP-BEC-2012-07-01 (Business Economics)
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