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Short-Run Behavior of Forward-Looking Firms, The

A theory of short-run competitive firm behavior allowing for nonmyopic risk aversion, randomness in input and output prices, as well as forward trading and storage of final good and material input is introduced. If the firm is a forward looking risk-averse expected-utility maximizer, separation of production and storage from hedging decisions is obtained. Production and storage are shown to depend only upon forward and cash prices and to be independent of the agent's degree of risk aversion and the distribution of random prices. Comparative statics are derived regarding production, purchases, and sales. The hypotheses advanced are tested empirically with monthly data pertaining to the U.S. soybean-processing industry. The results support the model and suggest that in stationary equilibrium futures prices of the soybean complex have had little influence on crushings or production, but they have been important determinants of inventory levels. Both theoretical and empirical results indicate that short-run firm behavior is more complex than is generally assumed in the literature. They also suggest long-term firm behavior can be better understood by studying its short-term behavior rather than using the medium- to long-run models that are currently available.

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Paper provided by Center for Agricultural and Rural Development (CARD) at Iowa State University in its series Center for Agricultural and Rural Development (CARD) Publications with number 93-wp106.

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Date of creation: Jun 1993
Handle: RePEc:ias:cpaper:93-wp106
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