IDEAS home Printed from https://ideas.repec.org/a/pal/genrir/v21y1996i2p179-189.html
   My bibliography  Save this article

Investment Under Demand Uncertainty: The Newsboy Problem Revisited

Author

Listed:
  • Georges Dionne

    ([1] Economics Department, Université de Montréal, C.P. 6128, Succursale Centre-ville, H3C 3J7 Montréal, Québec, Canada [2] Risk Management Chair, HEC-Montréal)

  • Tahar Mounsif

    (Université de Montréal and Université de Rabat)

Abstract

In this article we study the effect of uncertainty on an entrepreneur who must choose the capacity of his business before knowing the demand for his product. The unit profit of operation is known with certainty, but there is no flexibility in our one-period framework. We show how the introduction of global uncertainty reduces the investment of the risk-neutral entrepreneur and, even more, that of the risk-averse one. We also show how marginal increases in risk reduce the optimal capacity of both the risk-neutral and the risk-averse entrepreneur, without any restriction on the concave utility function and with limited restrictions on the definition of a mean preserving spread. These general results are explained by the fact that the newsboy has a piecewise-linear, and concave, monetary payoff with a kink endogenously determined at the level of optimal capacity. Our results are compared with those in the two literatures on price uncertainty and demand uncertainty, and particularly, with the recent contributions of Eeckhoudt, Gollier, and Schlesinger [1991, 1995]. The Geneva Papers on Risk and Insurance Theory (1996) 21, 179–189. doi:10.1007/BF00941937

Suggested Citation

  • Georges Dionne & Tahar Mounsif, 1996. "Investment Under Demand Uncertainty: The Newsboy Problem Revisited," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 21(2), pages 179-189, December.
    • Handle: RePEc:pal:genrir:v:21:y:1996:i:2:p:179-189
    as

    Download full text from publisher

    File URL: http://www.palgrave-journals.com/grir/journal/v21/n2/pdf/grir199684a.pdf
    File Function: Link to full text PDF
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: http://www.palgrave-journals.com/grir/journal/v21/n2/full/grir199684a.html
    File Function: Link to full text HTML
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hau, Arthur, 2010. "Comparative statics of changes in risk on monotonically and partially responsive kinked payoffs," European Journal of Operational Research, Elsevier, vol. 201(1), pages 267-276, February.
    2. Watt, Richard & Vázquez, Francisco J., 2017. "An analysis of insurance demand in the newsboy problem," European Journal of Operational Research, Elsevier, vol. 259(3), pages 1064-1072.
    3. Jorge Ibarra-Salazar, 2005. "The Newsboy Model: Changes in Risk and Price," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 30(1), pages 99-109, June.
    4. Hennessy, David A. & Roosen, Jutta, 1999. "Stochastic Pollution, Permits, and Merger Incentives," Journal of Environmental Economics and Management, Elsevier, vol. 37(3), pages 211-232, May.
    5. Amigues, Jean-Pierre & Favard, Pascal & Gaudet, Gerard & Moreaux, Michel, 1998. "On the Optimal Order of Natural Resource Use When the Capacity of the Inexhaustible Substitute Is Limited," Journal of Economic Theory, Elsevier, vol. 80(1), pages 153-170, May.
    6. Touhami, A. & Martens, A., 1996. "Macroemesures in Computable General Equilibrium Models: a Probabilistic Treatment with an Application to Morocco," Cahiers de recherche 9621, Universite de Montreal, Departement de sciences economiques.

    More about this item

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:genrir:v:21:y:1996:i:2:p:179-189. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.