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Uninsurable Risks: Uncertainty in Production, the Value of Information and Price Dispersion

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  • Ana Paula Martins

    (Universidade Cat¡äolica Portuguesa)

Abstract

This 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.

Suggested Citation

  • Ana Paula Martins, 2007. "Uninsurable Risks: Uncertainty in Production, the Value of Information and Price Dispersion," Annals of Economics and Finance, Society for AEF, vol. 8(2), pages 341-383, November.
  • Handle: RePEc:cuf:journl:y:2007:v:8:i:1:p:341-383
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    References listed on IDEAS

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    Cited by:

    1. Ana Paula MARTINS, 2016. "Wealth-In-Utility and Time-Consistent Growth: Real Excursions with an “Overlapping” Welfare Function," Turkish Economic Review, KSP Journals, vol. 3(1), pages 54-81, March.
    2. repec:mje:mjejnl:v:10:y:2014:i:2:p:7-20 is not listed on IDEAS

    More about this item

    Keywords

    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;

    JEL classification:

    • 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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