The choice between multiplicative and additive production uncertainty
When modeling output uncertainty, the multiplicative specification is consistently chosen over the additive form, despite the latter being arguably intuitively more obvious. The rationale for this seems to be that when production risk is the only source of uncertainty, additive uncertainty does not reduce output below the certainty level, while multiplicative uncertainty does. We show that, in the absence of hedging, this result is drastically modified when there is simultaneous price and output uncertainty. In this situation the theoretical implications of the two specifications are sufficiently similar to preclude any a priori choice between the two. Thus the choice between the additive and multiplicative formulations may be dictated by how each performs in empirical analyses.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
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.:
- Honda, Yuzo, 1983. "Production uncertainty and the input decision of the competitive firm facing the futures market," Economics Letters, Elsevier, vol. 11(1-2), pages 87-92.
- Lapan, Harvey E. & Moschini, GianCarlo, 1994.
"Futures Hedging Under Price, Basis and Production Risk,"
Staff General Research Papers
10041, Iowa State University, Department of Economics.
- Harvey Lapan & Giancarlo Moschini, 1994. "Futures Hedging Under Price, Basis, and Production Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(3), pages 465-477.
- Dalal, Ardeshir J. & Alghalith, Moawia, 2009. "Production decisions under joint price and production uncertainty," European Journal of Operational Research, Elsevier, vol. 197(1), pages 84-92, August.
- Losq, Etienne, 1982. "Hedging with price and output uncertainty," Economics Letters, Elsevier, vol. 10(1-2), pages 65-70.
- Moawia Alghalith, 2005. "Estimation with price and output uncertainty," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 247-257, November.
- Moavia Alghalith, 2003.
"Empirical Analysis under Additive/Multiplicative Output Uncertainty,"
CRIEFF Discussion Papers
0301, Centre for Research into Industry, Enterprise, Finance and the Firm.
- Moawia Alghalith, 2003. "Empirical Analysis under Additive/Multiplicitave Output Uncertainty," Discussion Paper Series, Department of Economics 200301, Department of Economics, University of St. Andrews.
- Moavia Alghalith, 2003. "Estimation and Econometric Tests Under Simultaneous Price and Output Uncertainty," CRIEFF Discussion Papers 0302, Centre for Research into Industry, Enterprise, Finance and the Firm.
- Viaene, Jean-Marie & Zilcha, Itzhak, 1998. "The Behavior of Competitive Exporting Firms under Multiple Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 591-609, August.
- Dalal, Ardeshir J & Arshanapalli, Bala G, 1993. "Estimating the Demand for Risky Assets via the Indirect Expected Utility Function," Journal of Risk and Uncertainty, Springer, vol. 6(3), pages 277-88, June.
- Moawia Alghalith, 2006. "Hedging decisions with price and output uncertainty," Annals of Finance, Springer, vol. 2(2), pages 225-227, March.
- Britto, Ronald, 1980. "Resource Allocation in a Simple, Two-Sector Model with Production Risk," Economic Journal, Royal Economic Society, vol. 90(358), pages 363-70, June.
- Batra, Raveendra N., 1974. "Resource allocation in a general equilibrium model of production under uncertainty," Journal of Economic Theory, Elsevier, vol. 8(1), pages 50-63, May.
When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:26:y:2009:i:5:p:1129-1133. 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: (Shamier, Wendy)
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.