Title

The Forward-Looking Competitive Firm Under Uncertainty

Campus Units

Economics

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

1998

Journal or Book Title

American Journal of Agricultural Economics

Volume

80

Issue

2

First Page or Article ID Number

303

Last Page

312

DOI

10.2307/1244503

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.

Comments

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.