Adjustment Costs from Environmental Change Induced by Incomplete Information and Learning
The paper begins with the problem of a firm subject to random productivity shocks drawn from a particular distribution. We are concerned with the case whereby the distribution of the shocks changes without the knowledge of the firm. Over time the firm learns about the nature and extent of the change in the distribution of the shock and adjusts, incurring adjustment costs in the process. The long run loss in profits (Å½) due to the shift in the distribution we term the adaptation costs. The transitory profit loss, incurred while the firm is learning about the distribution shift, is termed the adjustment cost. The theory is developed and then applied to the problem of measuring adaptation and adjustment costs in the face of unanticipated and imperfectly observed climate change in agriculture. The empirical part of the paper involves estimating a supply function for corn that depends on actual weather realizations and expected weather, using county level data for the US. We then simulate the effect of an unobserved climate shock, where learning about the climate shock is by observing the weather and updating prior knowledge using Bayes Rule.
|Date of creation:||06 Jun 1999|
|Date of revision:|
|Contact details of provider:|| Postal: 2127 North Hall, Santa Barbara, CA 93106-9210|
Phone: (805) 893-3670
Fax: (805) 893-8830
Web page: http://www.escholarship.org/repec/ucsbecon_dwp/
More information through EDIRC
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.:
- 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.
- Robert Mendelsohn & William D. Nordhaus & Shaw, Daigee, 1992. "The Impact of Climate on Agriculture: A Ricardian Approach," Cowles Foundation Discussion Papers 1010, Cowles Foundation for Research in Economics, Yale University.
- Ellison, Glenn & Fudenberg, Drew, 1993.
"Rules of Thumb for Social Learning,"
3196332, Harvard University Department of Economics.
- Ellison, Glenn & Fudenberg, Drew, 1992. "Rules of Thumb for Social Learning," IDEI Working Papers 17, Institut d'Économie Industrielle (IDEI), Toulouse.
- Allison, G. & Fudenberg, D., 1992. "Rules of Thumb for Social Learning," Working papers 92-12, Massachusetts Institute of Technology (MIT), Department of Economics.
- G. Ellison & D. Fudenberg, 2010. "Rules of Thumb for Social Learning," Levine's Working Paper Archive 435, David K. Levine.
- Wolak, Frank A & Kolstad, Charles D, 1991. "A Model of Homogeneous Input Demand under Price Uncertainty," American Economic Review, American Economic Association, vol. 81(3), pages 514-38, June.
- Fanny Demers & Michel Demers, 1989.
"Price Uncertainty, The Competitive Firm and the Dual Theory of Choice Under Risk,"
Carleton Industrial Organization Research Unit (CIORU)
89-09, Carleton University, Department of Economics.
- Demers, Fanny & Demers, Michel, 1990. "Price uncertainty, the competitive firm and the dual theory of choice under risk," European Economic Review, Elsevier, vol. 34(6), pages 1181-1199, September.
- John Reilly, 1995. "Climate Change and Global Agriculture: Recent Findings and Issues," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(3), pages 727-733.
- Rulon D. Pope & Jean-Paul Chavas, 1994. "Cost Functions Under Production Uncertainty," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(2), pages 196-204.
- A.J. Fischer & A.J. Arnold & M. Gibbs, 1996. "Information and the Speed of Innovation Adoption," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(4), pages 1073-1081.
- 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.
- Hansen, LeRoy T., 1991. "Farmer Response to Changes in Climate: The Case of Corn Production," Journal of Agricultural Economics Research, United States Department of Agriculture, Economic Research Service, issue 4.
- Westcott, Paul C., 1989. "An Analysis of Factors Influencing Corn Yields," Outlook Reports 151701, United States Department of Agriculture, Economic Research Service.
- Blair, Roger D, 1974. "Random Input Prices and the Theory of the Firm," Economic Inquiry, Western Economic Association International, vol. 12(2), pages 214-26, June.
When requesting a correction, please mention this item's handle: RePEc:cdl:ucsbec:qt9mx119gc. 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: (Lisa Schiff)
If references are entirely missing, you can add them using this form.