Uninsurable Risks: Uncertainty in Production, the Value of Information and Price Dispersion
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.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
- Christopher D. Carroll & Miles S. Kimball, 1995.
"On the Concavity of the Consumption Function,"
- James Tobin, 1956.
"Liquidity Preference as Behavior Towards Risk,"
Cowles Foundation Discussion Papers
14, Cowles Foundation for Research in Economics, Yale University.
- Thomas J. Rothenberg & Kenneth R. Smith, 1971. "The Effect of Uncertainty on Resource Allocation in a General Equilibrium Model," The Quarterly Journal of Economics, Oxford University Press, vol. 85(3), pages 440-459.
- Feldstein, Martin S, 1971. "Production with Uncertain Technology: Some Economic and Econometric Implications," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 12(1), pages 27-38, February.
- Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
- Gollier, Christian & Pratt, John W, 1996. "Risk Vulnerability and the Tempering Effect of Background Risk," Econometrica, Econometric Society, vol. 64(5), pages 1109-23, September.
- Phelps, Edmund S, 1972. "The Statistical Theory of Racism and Sexism," American Economic Review, American Economic Association, vol. 62(4), pages 659-61, September.
- Dionne, Georges, 1987. "Essays on Economic Decisions Under Uncertainty, par JACQUES H. DRÈZE. — Cambridge University Press, 1987, 424 p," L'Actualité Economique, Société Canadienne de Science Economique, vol. 63(2), pages 282-289, juin et s.
- Diamond, Peter A. & Stiglitz, Joseph E., 1974. "Increases in risk and in risk aversion," Journal of Economic Theory, Elsevier, vol. 8(3), pages 337-360, July.
- Hartman, Richard, 1975. "Competitive Firm and the Theory of Input Demand under Price Uncertainty: Comment," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1289-90, December.
- Batra, Raveendra N & Ullah, Aman, 1974. "Competitive Firm and the Theory of Input Demand under Price Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 537-48, May/June.
- Hartman, Richard, 1976. "Factor Demand with Output Price Uncertainty," American Economic Review, American Economic Association, vol. 66(4), pages 675-81, September.
When requesting a correction, please mention this item's handle: RePEc:cuf:journl:y:2007:v:8:i:1:p:341-383. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Qiang Gao)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.