Optimal Output for the Regret-Averse Competitive Firm Under Price Uncertainty
We study the optimal production of a competitive risk-averse firm under price uncertainty. We suppose that the firm is also regret-averse. For example, if market prices ex post turn out to be very high the firm might regret not producing more. If it turns out that the price is low the firm might regret an over-production. We find that optimal output under regret aversion might be higher than under risk aversion. We also prove that optimal production could increase or decrease when the regret-averse coefficient increases. In general, we show that the regret-avers firm tend to hedge their bets, taking into account the possibility that their decisions may turn out to be ex post not optimal. These predictions can help explain the fact the price uncertainty has not such an extreme impact than those would be derived from pure risk-averse preferences.
|Date of creation:||25 Nov 2013|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
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- Carlos Laciana & Elke Weber, 2008. "Correcting expected utility for comparisons between alternative outcomes: A unified parameterization of regret and disappointment," Journal of Risk and Uncertainty, Springer, vol. 36(1), pages 1-17, February.
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- Richard Engelbrecht-Wiggans & Elena Katok, 2007. "Regret in auctions: theory and evidence," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 33(1), pages 81-101, October.
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- Daniel Krähmer & Rebecca Stone, 2013. "Anticipated regret as an explanation of uncertainty aversion," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(2), pages 709-728, March.
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