The Firm’s Perception of Demand Shocks and the Expected Profitability of Capital under Uncertainty
This paper revisits the results of the pioneering models of the firm under demand uncertainty and analyses the apparent disparity with respect to the signal of the investment-uncertainty relationship predicted by them. In the 1970’s-1980’s the modelling of demand uncertainty at the firm level taking into account the firm’s optimal choice of factor inputs constituted a cutting-edge research topic. But while setting the standards in the literature of the firm’s optimal behaviour under uncertainty, those models did not clarify the rationale behind the disparity of the results concerning the impact of increased uncertainty on the firm’s desired investment. In the context of an isoelastic stochastic demand function, where the shock variable may enter either linearly or non-linearly, we show it is the way the firm perceives the demand shocks that, by determining the shape of the profit function, establishes the signal of the investment-uncertainty relationship predicted by the model.
|Date of creation:||Dec 2005|
|Date of revision:|
|Contact details of provider:|| Postal: Rua Dr. Roberto Frias, 4200 PORTO|
Web page: http://www.fep.up.pt/
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.:
- Andrew B. Abel & Janice B. Eberly, .
"The Effects of Irreversibility and Uncertainty on Capital Accumulation,"
Rodney L. White Center for Financial Research Working Papers
21-95, Wharton School Rodney L. White Center for Financial Research.
- Abel, Andrew B. & Eberly, Janice C., 1999. "The effects of irreversibility and uncertainty on capital accumulation," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 339-377, December.
- Andrew B. Abel & Janice C. Eberly, 1995. "The Effects of Irreversibility and Uncertainty on Capital Accumulation," NBER Working Papers 5363, National Bureau of Economic Research, Inc.
- Smith, Kenneth R., 1969. "The effect of uncertainty on monopoly price, capital stock and utilization of capital," Journal of Economic Theory, Elsevier, vol. 1(1), pages 48-59, June.
- Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, vol. 5(2), pages 258-266, October.
- Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
- Andrew B. Abel & Janice C. Eberly, 1993.
"A Unified Model of Investment Under Uncertainty,"
NBER Working Papers
4296, National Bureau of Economic Research, Inc.
- Andrew B. Abel & Janice C. Eberly, . "A Unified Model of Investment Under Uncertainty," Rodney L. White Center for Financial Research Working Papers 14-93, Wharton School Rodney L. White Center for Financial Research.
- Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
- Kenneth R. Smith, 1970. "Risk and the Optimal Utilization of Capital," Review of Economic Studies, Oxford University Press, vol. 37(2), pages 253-259.
- Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-91, June.
When requesting a correction, please mention this item's handle: RePEc:por:fepwps:195. 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: ()
If references are entirely missing, you can add them using this form.