Forward-Looking Competitive Firm Under UncertaintyCARD Working Papers
Series Number93-WP 111
AbstractThis 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.
This working paper was published as Lence, Sergio H. and Dermot J. Hayes, "The Forward-Looking Competitive Firm under Uncertainty," American Journal of Agricultural Economics 80 (1998): 303–312, doi:10.2307/1244503.
Citation InformationSergio H. Lence and Dermot J. Hayes. "Forward-Looking Competitive Firm Under Uncertainty" (1993)
Available at: http://works.bepress.com/sergio_lence/11/