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Forward-Looking Competitive Firm Under Uncertainty, The

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Abstract

This study of the firm under uncertainty relaxes the standard single production cycle assumption. Under realistic circumstances, a forward-looking risk-averse firm will produce more than a risk-neutral firm, and an increase in the mean-preserving price spread will increase the risk-averse firm's production. These results depend on firms realizing that the prices of inputs required for production in subsequent periods are correlated with the prices of current output. There are two important implications of this work. First, empirical work should not assume, nor should it find a monotonic relationship between output and the level of risk or risk aversion. Secondly, one can rationalize previously unexplained real-world behavior such as the relative insensitivity of production and sales to current prices, and the spreading of sales over time.

Suggested Citation

  • Sergio H. Lence & Dermot J. Hayes, 1993. "Forward-Looking Competitive Firm Under Uncertainty, The," Center for Agricultural and Rural Development (CARD) Publications 93-wp111, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  • Handle: RePEc:ias:cpaper:93-wp111
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    1. Kloek, Tuen & van Dijk, Herman K, 1978. "Bayesian Estimates of Equation System Parameters: An Application of Integration by Monte Carlo," Econometrica, Econometric Society, vol. 46(1), pages 1-19, January.
    2. Myers, Robert J. & Thompson, Stanley R., 1988. "Generalized Optimal Hedge Ratio Estimation," Staff Papers 200967, Michigan State University, Department of Agricultural, Food, and Resource Economics.
    3. Barry, Christopher B. & Brown, Stephen J., 1985. "Differential Information and Security Market Equilibrium," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 407-422, December.
    4. Klein, Roger W, et al, 1978. "Decisions with Estimation Uncertainty," Econometrica, Econometric Society, vol. 46(6), pages 1363-1387, November.
    5. Dolado, Juan J & Jenkinson, Tim & Sosvilla-Rivero, Simon, 1990. " Cointegration and Unit Roots," Journal of Economic Surveys, Wiley Blackwell, vol. 4(3), pages 249-273.
    6. Robert N. Collender & David Zilberman, 1985. "Land Allocation under Uncertainty for Alternative Specifications of Return Distributions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 67(4), pages 779-786.
    7. Robert N. Collender, 1989. "Estimation Risk in Farm Planning Under Uncertainty," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 71(4), pages 996-1002.
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